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  • Emerging Markets Debt Daily

    The Fallout from Turkey’s Policy Rift

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 08, 2019

    The unexpected dismissal of Turkey’s central bank governor by a presidential decree raised new concerns about the institution’s independence and credibility. Russia’s inflation justifies the market expectation of additional rate cuts.

    The shocking removal of the Turkish central bank’s governor, Murat Cetinkaya, by President Recep Tayyip Erdogan led to a big selloff in both interest rates and currency
    (vs. Friday’s close). Many commentators questioned the legality of the move, which came less than three weeks ahead of the central bank’s rate-setting meeting. The consensus expectation was that falling inflation would allow a cut in the key rate by 100-125bps in July, but the dismissal raised the possibility of rate cuts frontloading (which might not be fully justified by fundamentals). The new governor, Murat Uysal, has great credentials, but there is still a wide-spread concern about the central bank’s credibility and independence under the new leadership.

    Russia’s latest inflation prints are likely to reinforce market expectation about additional rate cuts. Both core and headline inflation edged lower in June, with the latter undershooting expectations at 4.7% year-on-year. Judging by its latest comments, the central bank thinks that softening domestic activity and the return of disinflation (see chart below) leave room for more policy easing—albeit not necessarily in July, because many factors that pushed inflation lower (e.g., good weather, harvest) are considered transitory by monetary authorities. This sentiment is reflected in the market expectation of a 25bps rate cut in the next three months.

    China’s international reserves posted another small monthly increase in June (to USD3,119.23B), mostly on the back of positive valuation effects. The reserves’ stability is, no doubt, aided by existing capital controls, and we expect most of them to remain in place in the foreseeable future. The trade war and its impact on exports is an obvious risk as regards external surpluses. However, recent policy initiatives to further open up China’s domestic markets—including an earlier than expected removal of foreign ownership limits in the financial sector—might help to attract capital inflows, offsetting potential current account losses.

    Chart at a Glance

    Russia CPI YoY

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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