FAST FIVE: Amid Soaring Inflation, Turkey Bizarrely Cuts Rates; Lira Tumbles
What do you do if you have borderline hyperinflation coupled with accelerating capital flight and a collapse of international confidence in your country's institutions.
Two weeks after the Turkish central bank tightened monetary policy, a move which did nothing to boost confidence in the lira, the regulator went for broke and on Tuesday said that it will offer funds at its cheapest rate of 24% through the repo auction, 150 basis points lower than the overnight rate of 25.5% it's used for almost two weeks.
The implicit easing comes even though Nomura's economist Inan Demir said that Turkey had no need for monetary loosening at this stage, although clearly Erdogan disagrees.
Some of the nation's primary dealers were also asked to support the government's borrowing drive last week, according to three people with direct knowledge of the matter May 15: A 0.1% tax is reintroduced on some foreign-currency transactions to prevent speculation in foreign exchange and bolster the state's income May 9: The central bank ceased to provide liquidity at its cheapest rate of 24% by suspending one-week repo auctions May 6: A new swap instrument is implemented by the central bank that will allow it to bolster its reserves by borrowing gold from commercial lenders Rabobank's Piotr Matys summarized the non-stop chaos coming out of Ankara best: “At the time when Turkey needs to restore confidence in the lira among households, corporates and foreign investors, contradicting measures have been announced.
Such conflicting measures make Turkey increasingly unpredictable to foreign investors who will remain reluctant to deploy their capital despite an attractive valuation of Turkish assets.” The Turkish lira tumbled as much as 0.9% after the bizarro rate cute before eventually stabilizing some 0.4% against the dollar.