Turkey in focus | Calamatta Cuschieri

Markets summary

In a recent interview with Bloomberg, Turkey’s newly appointed central bank Governor Sahap Kavcioglu provided insight into the future of Turkey’s monetary policy. As expected, a contentious topic was one of central bank independence.

Turkey has removed three central bank governors in the past two years, subsequently prompting market players to think the institution has lost its independence. Despite formal assurances, including that the Monetary Policy Committee is composed of seven members using all independent available instruments provided by the Law, questions remain over the biases of the members.

Turkey has been caught amidst a struggle of weak economic growth and spiralling inflation, leading to conflicts between the stimulus keen government and the required monetary policy decisions in order to keep inflation under control.

Indeed the new central bank governor reiterated that the inflation outlook remains the policy maker’s primary concern. Turkey’s rate of inflation has reached 15.61 percent in February, in contrast to the medium-term inflation target of 5 percent set jointly with the Government, spurring the latest central bank decision to increase interest 200 basis points. The new governor stated that the committee will revisit the decision after witnessing developments.

In a reaction to the swift replacement of the central bank governor, the Turkish lira saw a steep decline in price of over 13 percent a week ago, and has since recovered only marginally. Yields on the 10 –year government bonds are at 17.7 percent currently, increasing sharply following the shock announcement, as further political risk is priced in.

Questions currently revolve around whether the central bank will use its arsenal of foreign exchange (FX) reserves to prop up the ailing currency, as it did through state banks last year. The new governor remained coy, and stated that exchange rates will be determined by supply and demand balance under free market conditions. However, he stated that the use of reserve-boosting tools may be used under the appropriate conditions.

From an operational standpoint, the new central bank governor stated that its business as usual, and they will be implementing a simplified operational monetary policy framework that strengthens the transmission mechanism and facilitates a simpler and clearer communication of the monetary policy decisions and practices.

Ultimately Turkey is currently caught between a rock and a hard place. Its inflation issues are unfortunately not easily solvable through monetary policy alone as other structural factors also come into play. Food prices have been a major issue and rigidities in prices of services and the exchange rate pass-through remain stumbling blocks in the effectiveness of monetary policy on the economy.

The country is having to battle this while struggling first with the recent geopolitical developments in the region and then with the challenges brought by the pandemic. Undoubtedly there needs to be cohesion between monetary and fiscal policies, and much is weighing on the previously announced Economic Reform Package.

The increasingly autocratic government is doing little to inspire confidence to foreign investors that the worst is behind them. However, Turkey remains an emerging market with huge potential, and pockets of attractive investment opportunities remain present, even in this difficult environment, particularly in the telecommunications sector.


Disclaimer: This article was written by Simon Psaila, Investment Manager at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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