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  • Emerging Markets Debt Daily

    Turkey’s Need for Right Policy Mix

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    June 18, 2019

    The need to find the right policy mix is getting more pressing in Turkey as April’s growth disappoints. Russia stands ready to provide more monetary policy support to boost domestic activity.

    The need to find the right policy mix is getting more pressing in Turkey after industrial activity weakened more than expected 
    in April (-4% year-on-year). Capital goods and consumer durables looked particularly fragile, raising concerns about the economy’s ability to stand on its own and without heavy fiscal support. The central bank made a tiny easing move yesterday, announcing an overnight lira liquidity facility for primary dealers at a rate that is 100bps lower than the benchmark. However, sticky inflation expectations and currency considerations may prevent it from deeper rate cuts going forward.

    Russia’s latest activity indicators fully justify the central bank’s dovish policy turn. The economy expanded by a mere 0.5% year-on-year in the first three months of the year, and the yearly industrial production growth slowed to 0.9% in April, undershooting consensus by a wide margin. The central bank stands ready to provide more support—the benign inflation backdrop leaves plenty of room to do so. However, boosting the country’s potential output calls for more decisive progress on the structural front.

    There is a race to the bottom among major central banks, as having a strong currency tightens financial conditions and weighs on growth. Today’s speech by European Central Bank (ECB) President Mario Draghi was peppered with hints about additional rate cuts—even though the ECB admitted that its models “cannot account for the weakness in underlying inflation”. But let’s cut anyway. The wisdom might be questionable—Google the “reversal rate” for example—but at least the emerging markets assets’ “party” can last for a bit longer.


    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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