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expectations. Few economists expected the national lender to take the risk of introducing an unexpected rate cut ahead of the controversial Istanbul mayoral revote—interpreted by many as another referendum on the Erdogan administration—to be held on June 23.
The next MPC meeting will be held on July 25.
Inflation data doubts grow. Given as 18.71% in May, official consumer price index (CPI) annual inflation in Turkey has stayed below the policy rate since last November (although the number of those who trust the veracity of the official inflation figures is patently declining) and certain market participants (who only pay attention to the macro data without having any real insight on what is occurring under and alongside the official figures) initially expected significant rate cuts in the second half of this year due to the falling official inflation rate—which hit a 15-year peak of 25.24% in October—and a deepening recession. However, the Istanbul re-run and rising tensions with the US over Ankara’s insistence that it will go ahead with a deployment of Russian S-400 air defence missile systems, said to pose a threat to the security of Nato military hardware, such as the F-35 stealth fighter jet, unsurprisingly limited the MPC’s scope for a rate cut. If the tensions were not showing any particular impact on the Turkish lira, officials would have found some other reason to put off a rate cut since the fundamental dynamics in the economy do not show any signs of a recovery. Although the headline macro figures paint a path to recovery, the Turkish economic reality does not offer any real hope of a recovery in the short term. Observers see the government as still focused on ad hoc efforts such as manipulating the dollar/Turkish lira (TRY) rate or cooking the inflation figures. The Erdogan administration is not sending any signals indicating that it might launch a recovery plan with real substance. Instead it rather prompts fresh loan cycles to keep zombie companies in the game. It is at the July 25 meeting that the latest lira and S-400 situations will drive the rate-setters’ decision-making. Helpfully, Washington has issued an ultimatum to Ankara that gives it until five weeks after the Istanbul revote to decide whether it will defy the US and Nato over the S-400s.
Turkish central bank to fund primary dealers of gov’t domestic debt at 23%. Turkey’s central bank has decided to fund primary dealers of the government’s domestic debt securities via overnight repo transactions at 100bp below its main policy rate of 24%, the national lender said on June 17 in a written announcement. The liquidity facility within the framework of open market operations is aimed at supporting the primary dealership system in view of its contributions to the deepening of financial markets and the effectiveness of monetary policy, the statement added. “The limits for the Primary Dealer liquidity facility will be determined taking into account the amount of Government Domestic Debt Securities purchased by Primary Dealer banks through the Treasury auctions, and this facility will have a limited share within the overall Central Bank funding,” the statement also said. The government has systematically killed off its domestic borrowing market for the sake of controlling interest rates since last November. Prior to the March 31 local elections, the government also killed foreign borrowing channels for the sake of controlling the Turkish lira (TRY). Recently, with markets discussing the likelihood of a Turkish default, the government has been inventing new ‘ingenious’ ideas to keep the boat float. The central bank’s monetary committee policy (MPC) has kept its policy rate at 24% for nine months but the government has announced fiscal easing measures in the meantime. With the latest liquidity move for the primary dealers, the central bank will indirectly buy government bonds, or it will indirectly print money to finance the government. The TRY, which has suffered a renewed bout of depreciation lately, was trading at 5.86 levels as of around 17:30 local time on June 17. The Erdogan administration has been anxious to prevent a big slide in the value of the currency ahead of the controversial Istanbul mayoral election revote scheduled for June 23 and seen as something of a referendum on the government’s economic competence and commitment to democracy.
52 TURKEY Country Report July 2019 www.intellinews.com