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Massive Rate Cut Puts Spotlight on Turkey ETF

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In a bid to stimulate economic growth, Turkey’s central bank slashed the key interest rates from 24% to 19.75%. The rate cut also surpassed analysts’ projection of a median cut of 250 basis points (bps), per a Reuters poll. Middle East’s largest economy saw the first rate cut in four and a half years and the biggest since 2002. Following the cut, Turkish lira gained around 0.5% on the day of announcement after losing a slight 0.5%.

What Could Have Triggered the Rate Cut?

The tapering of sky-high inflation was mentioned as a major reason for the rate cut. It is worth noting here that Turkey had to resort to aggressive rate hikes in 2018 due to inflation levels above 25% led by a collapse in Turkish lira. The hikes in turn made Turkey the only country among all emerging markets with the highest real interest rate. Now, with inflation levels below 16%, the Turkish government aims at sustaining the disinflation process. In this regard, the government stated that "maintaining a sustained disinflation process is the key for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery."

Political pressure and interference in monetary policy could have also led the major rate cut. It is believed that Central Bank governor Murat Cetinkaya was dismissed by President Tayyip Erdogan largely for not following instructions on monetary policy.

Turkey is also grappling with geopolitical concerns. The country is facing threats of sanctions because of its souring relations with the United States due to the purchase of the Russian-made S-400 missile defense system. Moreover, Turkey’s ties with the European Union are strained over oil and gas drilling near Cyprus.

Furthermore, it is widely believed that the rate cut will help Turkey recover from recession and bring down its 13% unemployment rate. Moreover, the current global economic conditions along with stability in lira suggest that there is room for more rate cuts. In fact, even after the massive rate cuts, Turkey’s real key interest rates continue to lead the chart among all emerging markets.

ETF in Focus

Against the backdrop, we would like to draw investors’ attention to the Turkey ETF which has gained 1.15% since the announcement of the policy on Jul 25. In the meantime, investors should stay on the sidelines in the near term and watch where Turkey’s economy is going as it faces chances of massive sanctions from the United States.

iShares MSCI Turkey ETF (TUR - Free Report)

The fund seeks to deliver investment results that replicate the price and yield performance of the MSCI Turkey IMI 25/50 Index which is composed of Turkish equities. With AUM of $374.8 million, the fund has 47 holdings. It has an expense ratio of 0.59% (read: US Tightens Sanctions on Iran: Country ETFs to Gain/Suffer).

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