Investors brace for possible rate cut amid Turkey’s 80% inflation

An electronic board displays exchange rate information at a currency exchange office in Istanbul, Turkey, on Monday, August 29, 2022.

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Investors are bracing for another potential rate cut – or simply keeping rates unchanged – as Turkey refuses to follow the economic mainstream in combating rising inflation. skyrocketed, currently at more than 80%.

Or indeed, investors can still tolerate the volatility of the Turkish market.

The Eurasian hub of 84 million people – to which many of the major banks in Europe and the Middle East still have sizable exposure, and which is subject to a lot of geopolitical tension – has seen massive market turmoil. in recent days, in addition to the severe currency decline of the past few years.

This week, Turkey’s stock exchange, the Borsa Istanbul, saw a big swing in the Turkish stock market, with Turkish bank shares falling 35% in the week ending on Feb. Last Monday, after achieving a 150% increase in the stratosphere from mid-July to mid-September. It prompted regulators and brokers to hold an emergency meeting, although they ultimately decided not to intervene in the market.

The cause of the variation? First, Turkey’s high inflation has prompted investors to pour money into stocks to protect the value of their assets. However, there are fears of higher US inflation and a Federal Reserve rate hike, potentially triggering a sudden downtrend, the analysts believe.

The drop wiped out more than $12.1 billion in market value from the country’s publicly listed banks.

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This is because the higher interest rates set by the US and a stronger dollar cause trouble for emerging markets like Turkey that import their energy supplies in dollars and have debts in dollars. large dollars, and therefore will have to pay more for them.

The market roadmap promotes margin calls, which are when brokers ask investors to add funds to their positions to offset losses on shares they purchased with “money.” deposit” or loan. That led to an increase in selling, until Turkey’s main clearing bank, Takasbank, announced the relaxation of requirements for collateral payments on margin trading. .

Bank shares and the Borsa currency in general have recovered slightly on the news, with a gain of 2.43% since Monday’s close at 2:00 pm in Istanbul. Borsa Istanbul is still up 73.86% to date.

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But analysts say the exchange’s aggressive activity is not in line with Turkey’s economic realities, as they await the Turkish central bank’s interest rate decision on Thursday.

Facing inflation of just over 80%, Turkey market shock in August with a rate cut from 100 basis points to 13% – sticking to President Recep Tayyip Erdogan’s steadfast belief that interest rates will only increase inflation, going against economic principles popular. All of this comes at a time when much of the world is tightening monetary policy to combat soaring inflation.

Country watchers are anticipating another cut, or at most a hold, which could mean the Turkish lira and the Turkish people’s cost of living in trouble. more confused.

Economists at London-based Capital Economics predict a cut of 100 basis points.

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“It is clear that the Turkish central bank is under political pressure to adhere to Erdogan’s easy monetary policy, and it is clear that Erdogan is focusing more on growth in Turkey, not too much. focus on addressing inflation,” Liam Peach, senior emerging markets economist at Capital Economics, told CNBC.

“While the Turkish central bank is under such pressure, we think it will continue with this rate-cutting cycle for another month or two… the chance of a rate cut is very slim. small.”

Timothy Ash, an emerging markets strategist at BlueBay Asset Management, also predicts a 100 basis point cut. Ash said Erdogan would not need a single justification for this, citing future elections as the reason behind the move.

Meanwhile, analysts at investment bank MUFG predict a current holding of 13%.

Economists expect continued high inflation and further declines in the lira, which has fallen 27% against the dollar so far this year and 53% last year.

Meanwhile, Erdogan remains upbeat, predicting that inflation will fall by the end of the year. “Inflation is not an insurmountable economic threat. I’m an economist,” the president said in an interview on Tuesday. Erdogan is not a trained economist.

Regarding the impact of Erdogan’s decisions on the Turkish stock market, Ash said, “The risk of these unorthodox monetary policies is that it creates a misallocation of resources, bubbles, eventually. break up together, posing great risks to macro-financial stability”.

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