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  • Emerging Markets Debt Daily

    Turkey - Cutting Rates with Relish

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    September 12, 2019

    Turkey seized the “disinflation moment” and delivered a larger than expected policy rate cut. A lack of inflation pressures in India leaves ample room for more policy easing.

    The Turkish central bank listened very carefully to President Recep Tayyip Erdogan’s policy advice and took it all to heart, delivering a larger than expected 325bps rate cut this morning. With last summer’s 625bps hike completely reversed, many observers keep wondering whether President Erdogan’s wish to bring the policy rate to single digits is going to materialize any time soon. Well, the tone of the central bank’s statement was reasonably cautious—which is a good sign. In particular, it said that the current policy stance is consistent with current inflation projections, which may be indicative of smaller rate cuts going forward.

    India’s inflation delivered another downside surprise in August, reassuring the market that there is ample room to cut rates—potentially as early as next month. Yearly headline inflation rose only marginally to 3.21%, staying well within the target range (4% ± 2%)—against the backdrop of noticeably softer domestic activity. Importantly, financial conditions continued to tighten in September—despite 100bps of rate cuts in the current cycle—and this poses additional headwinds to growth. The market agrees with this assessment, pricing in almost three full cuts for the next 12 months.

    Risky assets staged a rally this morning following the European Central Bank’s (ECB's) decision to restart its quantitative easing engine. The ECB cut its deposit facility rate to a record low (by 10bps to -0.5%), introduced a two-tier system for negative rates (presumably, to mitigate the impact of additional easing for European banks), extended targeted longer-term refinancing operations' maturity to three years, and promised to purchase EUR20B of debt each month starting from November 1. Forward guidance was very dovish as well. Still, the subsequent price action showed that the markets remain uncertain whether central banks will rescue the global economy or whether the central bank themselves are in need of a rescue.

    Chart at a Glance: Turkey Fully Reverses Last Summer’s Rate Hike

    Turkey Fully Reverses Last Summer’s Rate Hike

    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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