Economic policy will be unpredictable after Turks vote

Significance

The TCMB has responded quickly to a new wave of lira volatility ahead of local elections, forcing banks to borrow at the overnight rate of 25.5% instead of the 24.0% policy rate. Such decisiveness defies President Recep Tayyip Erdogan’s antipathy to high interest rates and is particularly welcome as the government tries to bolster support by reviving economic activity through accelerated public spending and ad hoc interventions.

Impacts

• A lira collapse would trigger renewed crisis and may be avoided, but nominal depreciation is likely and lira volatility almost certain.
• Inflation may decline, but only to 12-15% from September onwards.
• Low investor and consumer confidence, weak external demand and high interest rates, debt and unemployment may keep recovery to 0-2% growth.
• Economic discontent will persist into 2020, inducing Erdogan to continue clamping down despite the tradition for post-election conciliation.