An electronic board displays exchange rate information on Monday, August 29, 2022, at a currency exchange office in Istanbul, Turkey.
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Investors are bracing for another potential rate cut – or simply holding the current rate – as Turkey refuses to conform to economic orthodoxy with its soaring inflation, currently above 80%.
Or indeed, investors who can still control the volatility of the Turkish market.
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The Eurasian hub, home to 84 million people – to which many major banks in Europe and the Middle East remain significantly exposed and highly exposed to geopolitical tensions – has witnessed major market turbulence in recent days, in addition to dramatic currency declines. last few years.
The Turkish stock market, Borsa Istanbul, saw a major upheaval this week as Turkish banking stocks fell 35% in the week ending last Monday after a stratospheric 150% gain from mid-July to mid-September. This prompted regulators and brokers to hold an emergency meeting, although they ultimately decided not to intervene in the market.
The reason for the volatility? First, high inflation in Turkey had forced investors to pour their money into stocks to protect the value of their assets. But analysts believe it was the fear of higher US inflation and consequent rate hikes by the Federal Reserve that likely triggered the sudden bearish turn.
The decline wiped more than $12.1 billion off the market value of the nation’s publicly traded banks.
Russian tourist numbers to Europe fell sharply over the summer, but rose in several other destinations, including Turkey ( here ).
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This is because the higher interest rates set by the US and the resulting stronger dollar challenges emerging markets such as Turkey, which import their energy supplies in dollars and have large dollar-denominated debts, so they have to pay more for them.
The market shift prompted margin calls, which is when brokers require investors to add money to their positions to buffer losses on stocks they bought on margin or with borrowed money. This led to a further spiral of selling until Takasbank, Turkey’s main clearing house, announced on Tuesday that margin trading requirements would be eased.
Bank shares and Borsa as a whole rose slightly on the news, with the bourse up 2.43% from Monday’s close in Istanbul at 14:00. Borsa Istanbul is still up 73.86% year-to-date.
Soaring Inflation: What’s Next for the Central Bank?
But analysts say the stock’s positive performance is not in line with Turkey’s economic reality as they await the Turkish central bank’s interest rate decision on Thursday.
Faced with inflation of just over 80%, Turkey shocked markets in August by cutting interest rates by 100 basis points to 13% – sticking to President Recep Tayyip Erdogan’s staunch belief that interest rates will only increase inflation, contrary to widely held economic principles. All this comes at a time when much of the world is tightening monetary policy to combat soaring inflation.
Earth watchers are predicting another cut or at most a hold, which is likely to mean more trouble for the Turkish lira and the cost of living for Turks.
Economists at London-based Capital Economics predict a 100 basis point rate cut.
“It is clear that the Turkish central bank is under political pressure to follow Erdogan’s looser monetary policy, and it is clear that Erdogan is focusing more on Turkey’s economic growth and not so much on fighting inflation,” said Liam Peach, senior emerging markets economist. Capital Economics, told CNBC.
“Even though the Turkish central bank is under such pressure, we think they will continue this rate-cutting cycle for maybe another month or two … the window for rate cuts is small.”
Timothy Ash, emerging markets strategist at BlueBay Asset Management, also predicts a cut of 100 basis points. Erdogan doesn’t need that justification, Ash said, citing the upcoming election as the reason for the move.
Analysts at the investment bank MUFG, however, predict keeping it at the current 13% level.
Economists predict continued high inflation and a further decline in the lira, which has already fallen 27% against the dollar since the beginning of the year and 53% last year.
At the same time, Erdoğan is optimistic, predicting that inflation will fall by the end of the year. “Inflation is not an insurmountable economic threat. I am an economist,” the president said in an interview on Tuesday. Erdogan is not an economist by education.
Regarding the impact of Erdogan’s decisions on the Turkish stock market, Ash said: “The danger of these unconventional monetary policies is that it creates misallocation of resources, bubbles that will eventually burst, causing major risks to macroeconomic financial stability.”