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    Turkey – No Rate Hikes After All?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    April 05, 2021

    Turkey’s inflation accelerated further in March, but it can potentially start improving after April. Brazil’s central bank remains concerned about the budget’s impact on monetary policy.

    Turkey’s headline inflation accelerated to 16.19% year-on-year in March, but the market reaction was quite mellow (the currency actually rallied vs. U.S. Dollar) because the increase was in line with expectations (see chart below). Governor Sahap Kavcioglu made all the right noises recently about tight policies and bringing inflation down – and presumably this will be reflected in the central bank’s next statement. The question is whether this would be enough to prevent another market tantrum if there is no rate hike in April. One thing to consider here is the consensus expectation that inflation will peak in April. If this is indeed the case, the inflation optics can improve already in the summer, potentially justifying staying on hold now and paving the way for rate cuts later this year.

    Brazil’s central bank governor Roberto de Oliveira Campos Neto reiterated his concerns that an “unworkable” budget might affect monetary policy. The governor is currently guiding the market for another 75bps rate hike in May, which is less than 90bps priced in by the swap curve. Campos Neto’s argument is that the policy rate should stay below neutral for now because the economy still needs support. A very weak industrial production print for March (mere 0.4% year-on-year) and a major deceleration in activity surveys point in the same direction.

    The great story of Emerging Markets (EM) remittances is continuing in 2021. Mexico posted another very solid number for February (USD3.17B, just a touch below January’s USD3.3B), providing much-needed support for domestic consumption in a situation when the government does not want to spend more and the central bank might not be able to ease more.

    Chart at a Glance: Turkey Inflation – In Double Digits But Peaking?


    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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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