CBRT banks on employment and growth, Trump tapes not enough

Published 25.07.2018 21:25

The Central Bank of the Republic of Turkey (CBRT) decided to forgo additional interest rate hikes Tuesday, keeping the rate at which banks borrow from the bank at 17.5 percent. While some had expected a rate hike, the Turkish government had, countless times, reiterated their intention to keep rates as low as possible. In other potentially groundbreaking news, President Donald Trump's first "secret tapes" leaked by his former attorney were played by CNN yesterday on their broadcast. The question now is, will this affect the U.S. presidency and global markets?

Was the CBRT's "hold" decision, the right one? The answer to this question largely depends on who's asking. The reaction to the Central Bank's decision was more of a surprise than the announcement itself. Did markets truly believe the CBRT was going to raise rates 300 basis points as some outlets had reported? The Turkish lira fell over three percent immediately following the decision illustrating how off-guard the markets were caught. This perhaps is the most important takeaway from this rate decision.

Whatever your view on what the CBRT decided, we can all agree that it needs to be better at easing markets into an upcoming decision. Obviously this can only occur if the CBRT has the data it needs to make decisions days or weeks ahead of time. In this instance, I believe that the latest inflation data yet to be released, may reveal a tempering of consumer price increases, or the Bank had other intentions.

A central bank's intentions are dependent on their mandate. What is a central bank's mandate? The Fed, for example, has a dual mandate, keep inflation at two percent and keep employment at near full-employment. This is a crucial point. Both of these goals are equally important. No one cares how low inflation is or how strong the dollar is if unemployment is sky-rocketing. This helps to explain the CBRT's decision.

The new government is weathering a perfect storm like I've pointed out countless times. Copper, a bellwether for industrial production is at multiyear lows. Gold is also at multiyear lows. The U.S. dollar conversely is at multiyear highs. All of these things taken together spell impending disaster for the global economy. Turkey is not immune, nor is any other major economy, from the effects of a global downturn. Can the Turkish economy best weather this downturn with sky-high interest rates, rampant unemployment, and a private sector on the verge of collapse; or will the Turkish economy be able to deal with a temporary downward trend in the value of the lira as inflation slows and the economy comes back into balance?

This is a difficult question which the CBRT has chosen to answer using the latter scenario. If central banking was a science, computers could make interest rate decisions and thousands of central bank officials around the world would be out of jobs. The CBRT is taking a chance with their decision as all central banks do with their decisions. The decrease in the value of the lira of 3 percent Tuesday followed by a modest recovery mean the market may have overreacted. Perhaps the CBRT will be vindicated in coming weeks.

As for the way in which the CBRT announced their decision, this is certainly an aspect of central banking which needs to be reviewed with best practices. The Fed rarely surprises markets nowadays and the CBRT needs to take steps in this direction.

The Trump tapes are incredible, they are amazing, but they are neither definitive nor are they the end-all of the Trump Presidency. Trump will almost certainly survive if these are the most damning of the tapes - where Trump instructs Cohen to pay the National Inquirer to buy a story of a Trump affair in an attempt to quash it - it may even make him more popular.

Financial markets currently have bigger fish to fry and as impeachment and conviction are next to impossible in this climate; Trump will survive this and therefore the impact on financial markets will be nearly nothing.

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