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  • Emerging Markets Debt Daily

    Turkey Central Bank – Road to Redemption?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 23, 2020

    Turkey stayed on hold for the second month in a row, confirming a more cautious policy stance. South Africa went for a 25bps rate cut, but space for additional easing is shrinking.

    Turkey’s central bank kept its key rate on hold at 8.25% for the second month in a row. This is an encouraging signbut we are still pretty far from a truly credible policy setup, which should include a more explicit commitment to tighter policies in the case of a strong(er) recovery in domestic demand (especially against the backdrop of the rapid credit expansion). The central bank’s statement remained pretty much unchanged today, acknowledging higher inflation but linking it to supply-side pressures and hoping that external imbalances will eventually disappear. My morning tweet (@NGurushina) about Turkey’s policies (maybe) getting more orthodox was met with some “ha-ha” comments, but I think realizing that you reached/exceeded a policy limit is the first step on the road to redemption.

    South Africa’s dismal growth and below-target inflation paved the way for this morning’s 25bps rate cut to 3.5%. Governor Lesetja Kganyago sounded cautious – once again confirming this stellar reputation and drawing attention to multiple uncertainties at home and abroad. Looking forward, one more rate cuts should not be excluded at this point, but South Africa’s real policy rate based on expected inflation is now negative (see chart below). Governor Kganyago also noted that the economy is yet to feel the impact of the past rate cuts. In our opinion, this means a higher probability of a pause at the next rate-setting meeting.

    Mexico’s inflation picture got more complicated after today’s bi-weekly upside surprises. A jump in bi-weekly core inflation was particularly concerning as it shows that supply-side shocks might be more entrenched than previously thought. The market continues to price in three full rate cuts in Mexico in the next three months – which is starting to look a bit aggressive if the current inflation trend continues.

    Chart at a Glance: South Africa – Real Policy Rate’s Duality

    Chart at a Glance: Consensus Continues to See Sizable Fiscal Gaps in 2021

    Source: VanEck Research, 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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