This is your presenter atelier eschalada. This is another episode of real turkey channel, which manages to stay online, despite lack of any content, any charisma, any kind of visual effects to attract the audience. We are persistent people today, i’m talking about central bank’s monetary policy, council meeting and the indecision that came from that meeting. Central bank was expected to hike interest rates because of rising inflation and currency stability, and it failed to do so that’s at par for the erdogan administration. Now i also prepared a cover, for you, see every day i’m doing something new to attract your interest. Let’S look at what we’re going to talk about. First of all, even though i will be using the central bank as the subject of this video. Actually central bank is not independent. The decision is made by mr ardogan and his advisors and it’s ideological, because mr ardogan hates interest rates. The sad part of this decision is that the perception of turkey had changed drastically over the last month or so people that’s fund managers began to believe that turkey was on its way to adopt orthodox economic policies. That’S economic policies widely accepted around the world and proven to be affected through observation and empirical research that’s, because the central bank had raised rates last time when it met, and yesterday i surfed through the literature. Looking at what other analysts and investment banks were thinking about. Central bank decision there was not a single consensus because there are many surveys, but uh people expected a rate hike anywhere from 150 basis points.

That’S 1.5 percentage points to 300 basis, points which is three percentage points, and what did the central bank do? Central bank said? Nah not really, i think interest rates are high enough. Financial conditions are tightening, well we’re, not gon na do anything. Actually they did something. Turkish central bank pursues a strange type of monetary policy uh if you’re from europe or the united states, you are used to a single policy rate that’s the rate at which the central bank lands to financial institutions or the rate it is willing to defend it’s called Open markets operations rate in turkey, we have a corridor so that’s a central interest rate and turkey central bank quote unquote retains the flexibility of raising that rate by 150 basis points or lowering it by 150 basis points without really holding a monetary policy council meeting today. It did something it widened the bands, so actually the policy rate is still 10.25 percent, but the highest rate at which it might or will lend to financial institutions has been raised to 14.75 percent. So mr erdogan had his cake and ate it because there was no interest rate hike, but in the future there will be interest rate hikes and they will not be announced. I am laughing because really you know i i can’t believe what my ears are are telling me. This is just so strange uh you either raise the interest rates or you lower them, or you don’t change them, but you don’t pretend not to be raising the interest rates while at the same time what we call through a backdoor action.

You open the way to higher interest rates. Why was that a fatal error for mr erdogan? Turkey has lost roughly 14 billion dollars of foreign financial capital over the last 12 months, i’m sure there are other examples like argentina, perhaps some african countries and lebanon, but throughout this pandemic many emerging nations like turkey, had received inflows of foreign capital because their interest rates Are higher than the american or european interest rates? That’S called carry trade. We were a singular exception among countries which had not defaulted or had civil unrest. Two to defend the dollar turkish lira interest rate central bank wasted roughly 100 billion dollars of its effects reserves so that it’s now poor i’m, not going to say bankrupt because it can still land above from turkish financial institutions. But it has very little. Foreign exchange reserve cover, that is, if turkey were to be cut off from foreign borrowing. That is, if our creditors refuse to lend to us for one reason or other, or it could be that you know, foreign funds or foreign banks suddenly had an episode of shivers. They are afraid of the future. They are not landing to anyone. In that case, turkey has ammunition to pay off its maturing foreign debts and to pay off for its foreign trade deficit for roughly three months after that it’s game over insert new coin. Had central bank raised the rates by 150 basis, points or more turkey would have gained credibility.

People who stayed away from turkey, because the policy environment is so erratic and uncertain, but they said: aha, these people are changing, they are becoming more trustworthy. Perhaps we should put some of our money into turkey, and imagine i mean a country that has bled 14 billion dollars over a year and now gets it back in three months. We know what financial capital enters a country. It increases the value of the exchange rate, which in turn reduces inflation. Two. It also reduces interest rates because the money comes through interest, pairing instruments and when foreign funds come in and buy turkish t bills or government bonds, of course, interest rates decline, which also helps stimulate domestic demand and private capital expenditures. So we missed all of these advantages. In fact, we have came very close to the threshold of yet another balance of payments crises, which is a fancy word for a currency shock for those of you who had followed turkey for some time might remember our last currency shock, which was during the august 2018 Uh conflict with the united states, where we had detained an american pastor. Mr mr trump wanted him to be released. Turkey said judiciary is independent, it’s up to them. Uh and six days later, the pastor was released and sent back to the united states, but in the meantime, turkish lira lost something like 30 percent against the dollar. I’M. Sorry, we’re not close to one of those episodes, but this is going to be like death by a thousand stabs or a thousand small bites in the sense that, as our foreign debt matures, our banks and companies will not be able to borrow as much as they Had in the past, because it’s expensive, so money will leak out of turkish financial system, we have a trade deficit, so money will continue to leak out of the turkish financial system.

Also, people who are able to do so will take their money out of turkey and invest in another country where the government is more reliable and doesn’t try to cheat its citizens or foreign investors, it could get worse. We could have a chain of bankruptcies, because turkish corporations are heavily indebted in dollars and euros and after central bank’s decision today today is thursday by the way, thursday, 22nd of october, the currency shut up i’m. Sorry, the exchange rate shut up by two percentage points: that’s turkish lara last, roughly two percentage points against the dollar and if that continues, of course you have companies which produce sales or cash flow in turkish lira, but their debts are in foreign currency. So more of their cash flow will have to be dedicated to servicing foreign loans and they will have to lay off people and delay their capital expenditures, and that is going to do turkey to a recession. As importantly as i’ve said, every 10 increase in the value of dollar against the turkish lira adds two percentage points to turkish inflation cpi within the next three months. So as the currency depreciates, turkey is going to be stuck by another inflationary boom. How is the sword episode going to end well? At the end, central bank will have to raise rates, as it had done so at dozens of times over the last year, but it will be too late because several companies would have gone barely up, inflation would have risen by two percentage points and turkey would have Been doomed to a recession, this episode very clearly explains or demonstrates how all of turkish institutions have collapsed, and the only thing that works in turkey in terms of governance is the presidential office and it makes wrong decisions.

And secondly, if you mix ideology with economic policy, you face disaster. Thank you very much. This has been another very bright and cheerful episode of real turkey channels, i’m gon na, say goodbye and then go well.