Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    Turkey Stuns with Gutsy Rate Cut

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 25, 2019

    Turkey’s surprising 425 basis point (bps) policy rate cut led to a massive rally in local rates. Reports that Mexico’s central bank might shift to a dual mandate raised concerns about political pressure. 

    The newly-appointed governor of Turkey’s central bank started off with a gutsy 425 basis point (bps) policy rate cut
    this morning, causing a massive rally in local rates, especially at the short end of the curve. The main reason for the surprisingly large cut was a sharp fall in inflation so far this year and the expectation that the last year’s high base effect will bring it down further in the coming months (see chart below). The statement’s language left the door open for additional rate cuts, and the fact that the currency ended up stronger on the day might embolden monetary authorities to continue to easing cycle. Even with today’s cut, Turkey’s real policy rate remains high – especially against the year-end inflation forecast – and this provides an extra incentive to ease in order to give a boost to growth.   

    A report in Mexico’s El Financiero raised concerns that the central bank (Banxico) might stop targeting inflation and adopt a dual policy mandate (inflation and growth) instead. This is not a done deal, but the change is currently being discussed by representatives of the senate, the ministry of finance, and the central bank. Some commentators equated these developments with growing political pressure on monetary authorities – albeit such an arrangement is not unusual.

    The European Central Bank (ECB) left its key rate on hold this morning but made several dovish changes in the statement – including references to the lower rates and additional asset purchases – that set up a stage for additional policy easing. The main reason is that the Eurozone’s growth outlook is getting “worse and worse”, especially in manufacturing. By contrast, the activity data flow in the U.S. has started to look better lately (check today’s above-consensus capital and durable goods orders), supporting the nascent “U.S. divergence” narrative, as well as the expectation that the Federal Reserve’s forthcoming rate cut would fall into the “precautionary” rather than “recessionary” category.

    Chart at a Glance: Turkey Inflation To Benefit From High 2018 Base

    Turkey Inflation to Benefit From high 2018 Base

    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.