FAST FIVE: Lira Crashes To All Time Low After Turkey Shocks With 200bps Rate Cut Despite Soaring Inflation
“The Committee assessed that, till the end of the year, supply side transitory factors leave limited room for the downward adjustment to the policy rate.” Putting the rate cut in its (hyperinflationary) context, the rate cut virtually guarantees that Turkish inflation is about to turn even more hyper : In a hilarious twist, the TCMB justifed this insane move by pointing the finger to “advanced economy” central banks and arguing that since they see inflation as temporary – and since the Fed continues to inject hundreds of billions of liquidity every month – surely inflation must be transitory, and so Turkey can surely afford a rate cut, to wit: Central banks in advanced economies assess that the rise in inflation would be mostly temporary along with normalization in demand composition, easing of supply constraints and waning base effects.
Accordingly, central banks in advanced economies continue their supportive monetary stances and asset purchase programs Recent increase in inflation has been driven by supply side factors such as rise in food and import prices, especially in energy, and supply constraints, increase in administered prices and demand developments due to the reopening.
Anyway, here are some more “explanations” for the shocking cut: Despite the recovery in global economic activity in the first half of the year, recently published confidence indices have started to decline due to the effect of the pandemic.
Meanwhile, the “tightness in monetary stance has started to have a higher than envisaged contractionary effect on commercial loans.
In parting, the TCMB said that the “Bank will continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5% target is achieved.” Not surprisingly, now that it is abundantly clear that Erdogan will sacrifice the lira before he admits he has been wrong all along, the TRY crashed to a new all time low, plunging as much as 2.9% to just shy of 9.50 vs the USD, a move which we are confident will only accelerate to the downside with Erdogan having openly invited hyperinflation, and only a popular uprising having some chance of halting this catastrophic turn of events, yet a revolution will hardly be lira positive and as such expect much, much more weakness in the now doomed currency.