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  • Emerging Markets Debt Daily

    Turkey Central Bank Cuts More Than Rates

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 09, 2019
     

    I’ve got “Georgia Turkey on My Mind” again this morning. This is not because the monthly current accountslipped back into deficit in June (USD548M)—the 12-month running balance actually turned positive for the first time since 2002, signaling that the external adjustment is still taking place against the backdrop of weak domestic demand. The reason for concern is the ongoing hollowing out of the central bank. Several high-ranking officials were fired yesterday, including the well-respected chief economist. Well, I guess the inflation forecasts will now be “sorted out.” The market may be slow to react to this news—reports that the central bank got USD1B from China under the swap agreement may be more important in the short-term.

    An upside surprise in China’s headline inflation is unlikely to affect the central bank’s accommodative policy bias. Headline prices accelerated more than expected in July (to 2.8% year-on-year)—but this was mainly due to higher food prices (pork), whereas core pressures remained subdued. Further, yearly producer prices moved further into contraction territory (-0.3%). Even though commodity prices and a high base effect were the main reasons for the decline, the release signals that domestic demand needs more policy support, which we expect to be delivered in the “drip” format.

    Mexico’s industrial production recovered from the multi-year low recorded in May (in seasonally-adjusted terms), but the yearly growth remained very negative (-2.12% in June). Soft domestic demand and the nascent downward trend in headline inflation provide a good excuse for the central bank to start a rate-cutting cycle already in August. 


    1Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments, and net transfer payments.

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