The weekend just gone saw some extraordinary moves in Turkey.
Ankara dismissed the head of the Central Bank of the Republic of Turkey’s (CBRT), Naci Ağbal, and replaced him with professor Şahap Kavcıoğlu, according to a presidential decree published Saturday in the Official Gazette. ( Daily Sabah)
The departing Governor got the message that discretion was going to be the better part of valour.
Shortly after the announcement, Ağbal thanked President Recep Tayyip Erdoğan for his appointment to the post, despite his short tenure.
“I would like to thank Mr. President for all the positions he has appointed me to, including the governorship of the central bank. I would like to express my gratitude over my dismissal today. I hope it will all be for the best,” Ağbal wrote on Twitter. ( Daily Sabah)
What had he done that merited a sacking at the weekend? Well we find the answer to that on the website of the central bank or TCMB from Thursday.
The Monetary Policy Committee (MPC) has decided to increase the policy rate (one-week repo auction rate) from 17 percent to 19 percent.
The 2% interest-rate increase came with a promise of more if necessary.
The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability. In regard to the indicators pointing to a permanent fall in inflation and price stability, indicators for the underlying trend of inflation and pricing behavior, diffusion indices, demand and cost factors, and inflation expectations will continue to be monitored closely for their compatibility with the targets in the forecast horizon. Additional monetary tightening will be delivered if needed.
So we saw some old fashioned central banking with interest-rates being raised to combat inflation. This continued a trend which was bearing some fruit.
Since Ağbal’s appointment on Nov. 7, the lira had rebounded more than 15% from a record low beyond 8.50 to the dollar. Some $20 billion (TL 144.38 billion) in foreign funds also trickled into Turkish assets. ( Daily Sabah)
That will teach him to raise interest-rates……
Where did it go wrong?
Those who have followed the Turkish saga will remember a rather extraordinary statement from President Erdogan when he claimed high interest-rates cause inflation. Well in late January he was mining the same theme.
“Dear friends, I am absolutely against high interest rates,” Erdogan told businesspeople in Ankara.
Now why he appointed someone who was going to raise interest-rates may remain a mystery, perhaps it was hoped to be a quick fix?
If only we had known that an article praising the Governor was about to be published by The Economist!
In only a few months as Turkey’s central-bank governor, Naci Agbal, has breathed new life into his country’s currency and bolstered the bank’s reputation
Sadly for us but especially for The Economist they managed to release this an hour after it become known he was departing. So too late for those who use The Economist as a reverse indicator a role at which it had yet again established strong credentials.
Another Currency Plunge
Last night as markets began to open for the week there were obvious issues.
It is too soon to see how markets have reacted to Ağbal’s firing, but the Turkish lira was already being traded at a rate of 8.3575 to the dollar when markets in Asia began opening on Monday. ( Ahval)
The atmosphere was further confused by the finance minister talking about a commitment to free markets when expectations were for this.
Eurasia Group and other analysts predict that the Turkish government will likely intervene heavily in currency markets to prevent large capital outflows from occurring. ( Ahval)
It seems likely the latter is in play as the Lira has improved to 7.9 versus the US Dollar as I type this.
If we switch to the bond market it too has had a rough day. The benchmark ten-year yield is 17.26% or up 3.6% today. I guess that puts the US ten-year yield worries in perspective as today’s move is around double it. There will be even worse issues for bonds denominated in US Dollars with effects from yields and indeed the currency.
Then there is the stock market.
The Istanbul stock exchange briefly suspended trading on Monday after its main index fell by more than six percent………The Borsa Istanbul said its automatic circuit breakers were triggered at 9:55 am. Trading resumed at 10:30 am but could be halted again should the slide continue. ( Middle East Eye)
As I type this the BIST-100 index is 125 points or over 8% lower at 1403.
The Economy
Here we have been told that things have gone well.
Turkey has quite a resilient economy and it tends to rapidly recover from the shocks, a leading economist at the European Bank for Reconstruction and Development told Anadolu Agency on March 16……….Noting that Turkey was one of the very few countries in the world to record positive growth throughout the last year, Kelly said comprehensive fiscal incentives were instrumental in the growth. ( Huriyet Daily News)
Indeed he went further.
Noting they are in the process of updating their forecasts, he said: “I cannot give any precise figures, but if the current tight monetary stance is maintained, I would expect Turkey’s economy to grow around 4% to 5% this year, and around 4% in 2022.”
The problem here is how much you believe that. Starting with those that do there is the issue of the hangover where interest-rates were raised to 19% to try to deal with the inflationary consequences. Those less sure might like to note the unemployment figures.
Turkey’s unemployment rate dropped by 0.5 percentage points to 13.2% in 2020, the country’s statistical authority said on Monday.
Last year, the number of unemployed people was 4.08 million, down from 4.4 million in 2019, TurkStat figures showed.
Meanwhile, the number of unemployed people — aged 15 and over — was 4.06 million last year, down from 4.4 million in 2019. ( aa.com)
That too looks good in the circumstances but some are not so sure.
The new dataset, which contains the country’s labor statistics for January, reveals a gap of about 17 percentage points between the official unemployment rate and the one based on a broader and more realistic definition of unemployment, which stands at more than 30%. ( Al-Monitor)
Interestingly Eurostat seems to have been on the case because as of the third quarter of last year they were recording an unemployment rate of 24.4%.
There is a high in the official series because the employment rate looks very low and it has been getting worse.
The number of employed people — aged 15 years old and over — was 26.8 million, thus employment rate was 42.8% in 2020, down 2.9 percentage points.
Comment
Some of this is pure will of the wisp stuff as markets rise and fall. But even with that care is needed because the moves we have seen today are of such size that there will have been large losses in places. Also Turkish businesses which borrow in overseas currencies look like the price just got higher. This is a substantial issue.
Turkey‘s short-term external debt stock – debt that must be paid in the next 12 months – reached $140.3 billion in January, according to official data on March 17……Nearly half of the debt stock was in U.S. dollars – 43.9%, followed by 27.3% in euros, 13.9% in Turkish liras, and 14.9% in other currencies. ( Hurriyet)
As I look at events I see that there seems to be a cap on the Turkish Lira at 8 versus the US Dollar so that seems to be the foreign exchange intervention level. According to Trading Economics the level of reserves is shown below.
Foreign Exchange Reserves in Turkey decreased to 52660 USD Million in March 12 from 53250 USD Million in the previous week
However those are gross reserves and the net issue ( allowing for swaps and borrowing) is worse. Some argue you have to take 10 billion off and a few suggest that the number may now be negative.
In the supporting cast is the fact that interest-rates are still 19% but it would be wise for players to lock that in as it seems unlikely to last. Or rather it would have to be forced on the central bank now. If we switch to the issue of inflation we see that Turkish workers and consumers seem set to be hit again. Last year’s growth figures relied on the inflation numbers which are especially open to doubt in the circumstances.
It was only last week I noted this about the Spanish bank BBVA.
In 2020, Garanti accounted for 8.1% of total BBVA Group assets, while its €563 million contribution to BBVA Group net profit represented 14.3% of total profit generated by the Group’s business areas as a whole (€3.9 billion), excluding the corporate centre.
Podcast
https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast120
Notayesmanseconomics's Blog 
Hello Shaun,
I feel Turkeys problems with its currency has more to do with politics than the economy overall.
They are ticking off the EU and we have an interventionist president again in the US of A .
so to put pressure on you put pressure on the Lira , Turkey has far too little dollar reserves to play this game for to long.
Turkey has gone a long way in modernising itself but , you know, the piper is not a nice guy ……
Sorry I know you dont do politics but sometimes those pesky politicians stick their nose in 😉
Forbin
PS: Might be worth checking out Russian bank accounts …….
Hi Forbin
There are plenty of issues with President Erdogan that do not help. But events in financial markets were getting more favorable until he decided to give Governor Agbal the order of the boot.
I think this is the only way a country like us will ever see interest rate rises to levels like 19%-trying to protect a run on the currency, which would be great for resetting the housing market and the economy in general, but it would also be the loss in purchasing power that would accompany it for those that did not participate in this speculative binge and orgy that would be so unfair, it last happened in 1992 when George Soros broke the Bank of England and they had to put up interest rates(overnight rates to nearly 20%) , it only lasted a day or two and then they announced the withdrawal of the pound from the ERM. Basically the Bank of England had run out of money to throw at supporting sterling.
I have written on here many times before how sterling will probably collapse if the government and the BofE keep on this current insane course of policies to support the housing market, but its eventual demise is only being slowed by the fact that all other countries are doing the same, the end will resemble Turkey’s desperate actions in raising rates to astronomical levels as the arrogance of the Bank of England will test the markets one time too many, and once that confidence has gone it is virtually impossible to get it back, and by then no one wants to hold sterling at any interest rate. I’m sure the governors and the government think this gamble with all our money and our futures is worth taking to protect a grossly distorted obscene housing bubble driven mostly by pure greed.
the idea I think is to do that (!!)
but also the thesis that we’d all be poorer if we could afford to buy a house …… well that’s what it means doesnt it? The BoE much vaunted “wealth effect” has been and gone , if it every really existed *
forbin
* BOE: yes Forbin its “wealth” if you can borrow off your rising house price. Helps the TBTF Banks, you know, Profits
Me: no that’s debt , not wealth, and anyway , why are TBTF Banks still bust , I mean after all this time and you helping them and all that.
BOE: You dont understand modern economics ..
Me: more like you dont and are hoping I wont notice……
Off topic analysts are forecasting a spike in inflation in the UK:
By David Milliken
LONDON (Reuters) – British inflation is on course to rise rapidly this year, to well above its 2% target, throwing into sharper relief splits at the Bank of England about how vulnerable Britain is to a more lasting rebound in prices after the COVID-19 pandemic.
Consumer price inflation, the measure targeted by the BoE, was just 0.7% in January but economists at Bank of America (NYSE:BAC) and Pantheon Macroeconomics see it reaching 2.5% by late this year. The BoE’s forecast last month was just below 2%.
Most of the increase is likely to come in the next few months, due to the raising of a price cap for many domestic energy bills from April and a 50% surge in oil prices since effective COVID-19 vaccines were announced last year.
The impact of higher prices will be magnified as they are compared to levels a year ago, when demand slumped at the start of the pandemic, briefly pushing oil prices below zero and sending British inflation to its lowest since 2015.
The same pattern is visible in the United States and the euro zone.
“All central banks are in a similar position that their headline inflation rates are going to be above their targets by the end of the year because of the rebound in oil prices,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
British inflation is likely to get an extra push in August, when restaurant prices will be compared against discounts a year before under a government scheme to attract diners during a lull in the pandemic, and again in October, when a temporary sales tax cut for hospitality begins to be phased out.
Brexit and COVID-19-related disruption is also pushing up the cost of some imports from the European Union and elsewhere, though it is too early to see a clear impact on overall prices.
NO RAPID ACTION
BoE Governor Andrew Bailey has stated that Britain’s central bank — which is in the middle of rolling out 150 billion pounds ($207 billion) of quantitative easing bond purchases agreed last year — will not tighten policy at the first sign of inflation.
The BoE last week affirmed it would wait for “clear evidence” that inflation would stick at 2% and that spare capacity in the economy such as joblessness was reducing before considering tighter policy.
But last week’s meeting set the stage for a dispute later in the year — when inflation is likely to be above target and headline growth rebounding sharply — about whether the economy is at risk of overheating.
The minutes noted “a range of views” on how much spare capacity exists now, how fast it is likely to be used up, and how the post-pandemic recovery will differ from others.
BoE Chief Economist Andy Haldane has likened the economy to a “coiled spring” and described inflation as a “tiger” that is beginning to stir.
Inflation is more likely to overshoot than undershoot BoE forecasts, he said, as richer households spend savings built up during lockdown and due to mismatches between supply and demand. He also sees a risk of a long-term reversal of past globalising trends that brought cheap goods and migrant workers to Britain.
But to many economists, the inflation pressures Britain is facing look more like the temporary factors the BoE has looked through in the past than the start of a longer-term change.
Few see rates rising before the tail-end of 2022 at the earliest.
JOB MARKET KEY
How Britain’s job market responds after the government furlough programme ends in September will be key for the BoE’s Monetary Policy Committee, said Philip Shaw, chief UK economist at Investec.
“It would be surprising if the MPC as a whole began to make some very hawkish noises on monetary policy before anyone gets clarity on the labour market,” he said.
If British wages do rise significantly after the pandemic, putting upward pressure on inflation, it will mark a sea-change from the previous decade, when wage pressures were very muted despite unemployment falling to its lowest since 1975.
The fact that British inflation averaged close to its 2% target between 2008 and 2019 largely reflected the inflationary impact of two big falls in sterling in 2008 and 2016.
Pantheon’s Tombs also saw little sign of wage pressures over the next two to three years — the time horizon the BoE normally focuses on — and added that a rise in sterling since late last year was likely to reduce inflation in 2021.
But he said Haldane was right to point out longer-term dangers of greater inflation now that Brexit had made it harder to import workers from the European Union.
“In time I think wages could be a problem for businesses,” Tombs said. “But I see that as three to four years down the line, once the recovery is much more mature.”
($1 = 0.7231 pounds)
Interesting comments from Pantheon’s Tombs as thre £ rises it should reduce inflation, I suspected this as we import more than we export.
If inflation does rise above 2% in the latter half of the year it will mean higher pensons next year as they rely on the data in October/Nvember from memory.
Unless of course the GOV scrap the triple lock but the Chancellor may face a backlash if he does after all the furlough and other meassures he has given to workers the last 12 months.
Hi Peter
As you know I have been saying that inflation is on its way for a while. But the real issue is whether it is to some extent a reflection of whether it simply balances last year ( Eat Out To Help Out for example) or is a more sustained inflationary burst. If it turns into the latter then there is a problem because many people are struggling as it is.
Great blog and podcast as usual, Shaun, and congratulations on getting a response from the ONS regarding its wage series.
It may not be perfect, but the US Bureau of Labor Statistics employment cost index is a superior measure of labour compensation:
https://www.bls.gov/opub/mlr/2016/article/introducing-2012-fixed-employment-weights-for-the-employment-cost-index.htm
It is a quarterly, not a monthly series, but the 2020Q2 increase was 0.4%, not annualized, the lowest quarterly rate of increase since 2015Q2. Since there are fixed weights over occupations, one doesn’t get, or at least shouldn’t get, an increase in an industry index due to layoffs of workers in lower-paid occupations.
It is a chain Lowe price index like the UK CPI, but the index basket only changes every ten years, much like the old US CPI. If the basket is going to be changed so infrequently, it would make better sense to calculate a direct Laspeyres index for the most recent period, with the ECI revised back to 2008 to incorporate the 2012 weighting pattern, along the lines of the old UK producer price index. Just the same, the ECI is probably the state-of-the art labour compensation index in the world today. If there is a better one, I would like to know what it is.
Hi Andrew and thank you
The ECI sounds a much better measure than average earnings. Changing the basket only every 10 years brings its own problems. However they are right about this bit.
“No single index can be ideal for all three types of analysis. For instance, an index that is appropriate for analyzing long-run changes will not be the best for measuring the current rate of labor cost increases, and vice versa.”
Returning to UK average earnings the numbers have quite a few problems and the National Statistics label should be suspended until they are fixed. But we only have to wait until tomorrow to see what short-term changes have been made