Turkey’s central bank kept the benchmark one week repo rate unchanged at 24% in Jan 16’s Monetary Policy Committee (MPC) meet. Turkish’s high inflation levels had cooled down for the second consecutive month in December, sparking speculation that the central bank will enact a rate cut ahead of the campaign for local elections. However, these were put to rest with the latest policy move. Turkey’s annual inflation was 25.24% in October — marking a 15-year high (read: Turkey Inflation at 15-Year High: ETF in Focus).
Per Turkey’s central bank, though there have been improvements in the inflation outlook from developments in import prices and domestic demand conditions, risks on price stability prevail. Per the bank statement, recently released data point indicates that the rebalancing trend in the economy has become much more noticeable. External demand maintains it strength, while tight financial conditions are partly responsible for the slowdown in economic activities.
The prospects of loose policy in Turkey have weighed on the lira. However, the unchanged policy rate is favorable for Turkish lira, which has made significant gains against the U.S. dollar in 2019. Lira has gained more than 1% against the greenback in the year-to-date time frame. Per Inan Demir, an economist in Nomura International Plc, lira seems to be free from pre mature rate cuts ahead of the local elections. However, re-emergence of geopolitical tensions could put the currency under pressure.
President Tayyip Erdogan is known for opposing rate hikes. He has repeatedly vouched for lower interest rates to keep credit flowing to the construction sector and the broader economy. These comments raised questions on the central bank’s independence, contributing to a major-sell off in the currency in 2018.
Jason Tuvey of Capital Economics, who had forecast a rate cut in the recent MPC meet, expects Presidant Erdogan to put pressure on the central bank for lowering interest rates in the Mar 6 MPC meet, keeping local election campaign in mind. Local elections poll is scheduled for Mar 31.
On Jan 16, President Tayyip Erdogan had been granted emergency powers by the Turkish Parliament to take all necessary measures in case of a “negative development” that could spread across the entire financial system. The parliament also approved the formation of Financial Stability and Development Committee that would be responsible for finding solutions to monetary stability and security related risks, according to the law.
What Lies Ahead?
Central bank of Turkey confirmed that it will continue to use all available instruments in pursuit of the price stability objective. Per the bank, all factors affecting inflation will be closely monitored and if needed, further monetary tightening will be delivered.
TUR in Focus
iShares MSCI Turkey ETF(TUR - Free Report) has been performing well, returning about 7.2% in the year-to-date time frame and nearly 5.5% over the past four-weeks (as of Jan 17) (see: all the European Equity ETFs here).
The ETF could be in for a volatile trade in the weeks ahead given the tensions with the U.S. over Syria, vesting of emergency powers with the president and local elections coming up. Below we highlight the ETF in detail:
The fund tracks the MSCI Turkey Investable Market Index and comprises 53 holdings. The fund’s AUM is $538.7 million and the expense ratio is 0.59%. Sector wise, Financials (29.3%), Industrials (21.9%), Consumer Staples (14.9%) and Materials (11.4%) have double-digit allocation. The fund is highly liquid having a daily average traded volume of 1.2 million shares. It has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (read: Best & Worst Zones of 2018 and Their ETFs).
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