Danske Bank analysts: Erdogan should impose capital controls

According to Danske Bank analysts, Turkish President Recep Tayyip Erdogan must either tighten monetary policy or impose capital controls in order to stop the dollar / pound rally. They believe that Erdogan will be persistent this time and will not be easily persuaded, but there are some possible factors that could change the game: pressure from the business community, signs of a bank run and the threat of early elections.

“With limited security reserves, TCMB’s recent interventions are nothing short of a sign of despair and, therefore, are more likely to undermine their credibility than to stop the pound from falling. More extreme measures, such as capital controls, do not can be ruled out, “said Danish central bank analysts.

“At the moment, there are no signs of a policy reversal, and if Erdogan is not discouraged by the threat of a bank run or early elections, we believe that lower real interest rates, weakening fundamentals and even tighter global financial conditions will lead to below “, they point out.

“Basically, President Erdogan is trying to fight the ‘Mundell-Fleming trilogy’ which states that a small open economy like Turkey can not pursue a stable exchange rate, free movement of capital and independent monetary policy at the same time. Unless Erdogan wants If the dollar / pound exchange rate continues to rise (creating higher or even hyperinflation), Turkey must either tighten its monetary policy, ie abandon its independent monetary policy or impose capital control (or apply price controls, which would lead to a shortage of goods in the economy). ”

Petros Kranias

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