What is happening in Turkey?

Last Thursday, the Central Bank of Turkey (CBRT) reduced Turkey’s policy rate by 100bp to 15%. The CBRT’s assessment of inflation was little changed from October.
Nachu Chockalingam

Senior Credit Portfolio Manager

Federated Hermes

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This week’s Chart of the Week looks at the recent weakness we’ve seen in Turkey and why there has been a meaningful underperformance of the lira vs. sovereign CDS and bonds and hard currency corporate bonds issued from Turkish companies.

Last Thursday, the Central Bank of Turkey (CBRT) reduced Turkey’s policy rate by 100bp to 15%. With the lira depreciating materially into this meeting some market participants had been expecting the bank to pause in this meeting and resume its cuts in December or early next year. The CBRT has so far pushed through 400bp of easing over the past three months and continues to appear to be comfortable cutting rates in an environment where inflation is close to four times higher than the official 5% rate, the lira is under growing market pressure, global inflation is rising and a large number of EM countries are tightening their monetary policy.

In last week’s release, the CBRT’s assessment of inflation was little changed from October, with policymakers highlighting that the recent spike in inflation is likely to be largely transitory as it is being driven by supply-side constraints and increases in energy and food prices and they expect these temporary effects to fade only by Q322. In line with this, they changed their forward guidance to suggest that the easing cycle may end in December but many market participants are not convinced by this given their previous decisions – in September, the start of the current cycle, the CBRT abandoned its commitment to keep the policy rate above inflation and said that focus would shift to core inflation dynamics going forward but in October, when core inflation rose, the bank responded by delivering a larger-than-expected 200bp cut.

The lira has felt the brunt of much of the volatility seen in Turkish assets of late, depreciating to now 11.25 vs. USD (34% down YTD). Turkish hard currency credit, sovereign and corporates, have been much less impacted, and some bonds remain hard to source despite the negative newsflow. We do believe that part of the answer to the latter is that Turkish hard currency credit is very technical at the moment with a high degree of local investor support. Many foreign credit investors have, we think, adopted a more underweight stance towards Turkey, especially given the volatility we’ve seen in recent years and unorthodox policy moves, and this has also helped Turkish credit from being insulated against the volatile moves we have seen in the lira.

Source: Federated Hermes

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What is happening in Turkey?