Midnight Decrees Hound Banks Again in Turkish Election Deja Vu

Beril Akman
·5 min read
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) -- Turkish policymakers are having to revert to old habits with the approach of elections and the lira selling off, sidestepping the prospect of higher interest rates in favor of micro-managing lenders to keep the currency in check.

Most Read from Bloomberg

In two consecutive midnight announcements this week, the central bank said it would use alternative policy-tightening measures such as reducing the monthly growth limit on a wide set of local-currency loans. And in an echo of methods used in the build up to last year’s presidential elections, lenders that don’t comply must buy government securities and park their extra liras at the central bank as required reserves.

As the lira heads to its worst weekly performance since late July, the central bank also began selling lira-settled foreign-currency forwards for the first time since then and verbally told banks to rein in foreign-exchange purchases.

The changes borrow from the approach of an earlier era when ultra-low rates were in place at the urging of President Recep Tayyip Erdogan. The dilemma now is different, however, following a series of rate increases that ended in January.

While the central bank has remained hawkish, saying it would tighten monetary policy stance if the inflation outlook deteriorates, economists think that’s unlikely until after local elections at least.

Erdogan has been supportive of the new team he’s assembled to run the economy but as voices within the ruling party, including its senior official in charge of the economy, complain of damage to businesses, raising rates is seen as an unfavorable step.

Selva Demiralp, a professor of economics at Koc University, said there’s a “resemblance in motivation” with the period before elections, when the central bank “attempts to complement its interest rate policy with macroprudential tools to avoid political pressures, in an environment of weak central bank independence.”

But Demiralp added that there were also differences between the two periods. Former officials used alternative tools to “mitigate the side effects of unconventional policies and facilitate financial repression” whereas now the aim is to “enhance the impact of interest rate increases on an economy weakened by issues inherited from the previous period,” she said.

The meddling under newly installed Governor Fatih Karahan, however, could unsettle the financial industry once subjected to near-daily regulatory tweaks that sought to cool domestic demand and steer the lira without having to raise the key rate. Until recently, it was an approach largely abandoned after presidential elections last May as policymakers looked to simplify a tangle of regulations.

But with the currency coming under pressure and local elections in Turkey’s biggest cities just weeks away, the choice is to reach into the toolkit that current central bankers chastised not long ago.

“The view that the central bank is trying to strengthen policy through side measures because it cannot independently make decisions on interest-rate hikes is picking up,” said Haluk Burumcekci, an economist in Istanbul.

“In the recent period, the progress on simplification steps has reversed and makes one think that there’ll be similar steps in that direction at least until the local elections,” Burumcekci said.

Inflation came in faster than forecast in February, feeding doubts in the market about whether the current policy rate is high enough at 45% with price growth on track to exceed 70% in the coming months. Economists at banks like JPMorgan Chase & Co. now expect rates to rise further after March elections.

Pressure began to build on the lira at the start of this week, prompting heavy currency sales by state banks to meet demand, according to traders. The lira has dropped more than 7% so far this year against the dollar, the worst-performer in emerging markets after the Chilean peso.

Finance Minister Mehmet Simsek has urged calm, anticipating that a pickup in foreign inflows after the ballot will keep the currency from real depreciation.

What Bloomberg Economics Says...

“Tightening through regulatory changes is not a perfect substitute for an actual policy rate hike. Indeed, it could contribute to a worsening of inflation expectations. The overall impact on financial conditions is ambiguous, because rising demand for government securities by non-complying banks could mean an easing in bond rates.”

— Selva Bahar Baziki, economist. Click here to read more.

The central bank’s tilt away from more mainstream measures may prove short-lived, given that the reins of monetary policy remain in the hands of officials who’ve sought to break with unorthodox economics.

Deputy Governor Cevdet Akcay, appointed to the Monetary Policy Committee last July, publicly complained that earlier unconventional policies made it harder to achieve the transmission of rates into the economy.

Akcay, who worked as the chief economist of a top Turkish private lender for more than a decade, said last month the central bank was trying to fix the broken mechanism by creating a system where a 45% rate would be enough.

Policymakers will meet 10 days ahead of the election on March 21.

For Hakan Kara, central bank’s former chief economist, the evidence so far suggests their “main policy tool is being restricted.” “They are having to press all the buttons except for the interest rate to manage until the elections,” he said on social media platform X.

--With assistance from Baris Balci.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.