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ANALYSIS: Both the central bank and Minister Albayrak fail the market test with no rate hike!

Both the Central Bank and Minister Albayrak failed to pass the current market test. The market will now wait and look at the content of the Medium Term Fiscal Plan to be announced on August 18th. If that plan too fails investors expectations, then it means Turkey will be one step closer to the IMF.

ANALYSIS: Both the central bank and Minister Albayrak fail the market test with no rate hike!

The Central Bank’s Monetary Policy Board held its first meeting since the June 24th elections today. After the spike in the consumer price inflation (CPI) to 15.39 percent in June, the expectation in the market was an increase of 100-150 basis points in the weekly repo rate. The Central Bank raised the policy rate to 17.75 percent with an increase of 125 basis points on 7 June.

The guarantees given by Treasury and Finance Minister Berat Albayrak on the occasion of the first foreign G20 meetings he attended over the weekend that they will follow a management that does not fight with the markets and that the central bank will decide on “multi-dimensional” basis on a realistic ground in the new period has given more meaning to today’s meeting. Thus, today’s meeting turned into a test on whether the central bank could turn proactive on the rising CPI with Minister Albayrak’s credibility down the line.

From the note the central bank released the sentence “Recently released data indicate a more significant rebalancing trend in the economic activity. External demand maintains its strength, while signs of decelaration in domestic demand become more visible.”  reveals the bank’s perception of weakening demand as the main reason for not raising interest rates. The definition of “multidimensional” monetary policy that Mr. Albayrak refers to has thus become meaningful. Instead of inflation targeting, it is possible to imagine that for the new economy management economic growth in the new term will take an active part in the monetary policy function; as it has been in the last few years.

This means that if the mistakes made in the last few years on the monetary policy front that carried the CPI inflation to 15.4 per cent today are to be continued after the elections; then insisting on the same mistakes will have a higher cost of disrupting the general balance of the Turkish economy via inflation and the Turkish lira.  This is a dangerous game given the heavy debt burden of the real sector companies and Turkey’s 401 billion dollars external deficit.

In brief, the independence of Minister Albayrak and the Central Bank were tested by the investors today. Both have failed the test.

Despite the expected further rise in CPI inflation, if Turkey’s central bank is seen as hands tied, then the investors will keep punishing Turkey’s macro management team through the lira.   NO need to say lira’s further weakness will keep feeding the inflation rate.  On the  back of rate hike expectations, the lira that gained ground against the US dollar to 4.70 levels weakened rapidly to 4.94 after the no rate hike news.

Both the Central Bank and Minister Albayrak failed to pass the current market test. The market will now wait and look at the content of the Medium Term Fiscal Plan to be announced on August 18th.  If that plan too fails investors expectations, then it means Turkey will be one step closer to the IMF.

GA.

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