What to expect from the critical Erdogan-Babacan and Basci summit?

TURKEY - In Brief 10 Mar 2015 by Atilla Yesilada

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Davutoglu received a second briefing today from his economy team and announced that President Erdogan will receive economy czar Babacan CBRT head Basci on Wednesday (time of the meeting not available to me). The critical summit was preceded by a global EM F/X sell-off, massive turmoil in Turkish markets, another minor step by CBRT to ease the pressure on TL, a plethora of confusing statements from ministers about the desirable course of the exchange and interest rates and a change of tone in the pro-AKP press regarding the advisability of lower interest rates. Don’t worry; I won’t bother you with the minutia of the debate in Turkey at a time when EM sell-off is foremost in your minds. I’ll cut right to the chase. What to expect from the summit? Scenario A: A new strategy to contain TL depreciation and hold off on rate cuts for a month (60%): The evidence comes from an article in staunchly pro-AKP daily newspaper Yeni Safak which claims that CBRT has been given a new “road map” through Babacan which advises it to use multiple instruments to calm down the dollar and pass on the rate cuts until after the Fed March FOMC meeting is out of the way. Today, Davutoglu bragged that speculators should not dare to bet on either dollar appreciation or rate hikes. Based on this rather slim evidence I conclude that while the presidential strategy team has not changed its longer term view of a weak currency and very low rates, it has finally grasped the danger of making the transition at a time when dollar is soaring globally and has decided to play it safe. Since March CBRT MPC is a day before FOMC announcement, rate cuts will be delayed and we may see higher daily F/X sales. I would...