“Market expectation for a large CBRT rate hike this week is very high. The front-end of the curve is now pricing in around +300bp of a hike. This is the largest expectation for one MPC meeting in Turkey for quite some time so it is clear that Albayrak’s comments last week have shifted expectation dramatically upwards. Given Turkey’s long history of underdelivering on expectations at CBRT meetings, and the recent clean-up in short-term USD/TRY FX positioning over the past week, the risk is to the downside for Turkish markets. If the CBRT under delivers, expect pressure to resume on the Lira and Lira bonds, especially as short-term positioning has cleaned up significantly over the past week. We are positioned neutrally on Turkish Lira assets given its high volatility, weak fundamentals and very limited visibility on policy direction. A rate hike of +500bp or more would, in our minds, demonstrate the Central Bank is firmly committed to currency stability and to driving down medium term inflation expectations, even at the cost of much slower growth.
“Turkish growth is slowing very quickly, with Q3 GDP now looking very likely to be negative on a YoY basis. This will lead to pressure on banking sector asset quality and raise questions again about Turkey’s ability to fund its large external financing requirement. Given this backdrop it seems counterintuitive for the Central Bank to therefore need to hike rates, but the key here is the currency, inflation expectations and private sector external debt liability rollovers. The Lira needs a credible monetary policy anchor and throughout 2018 that has been missing. The most effective way to reintroduce this is to get the ex-ante real policy rate back up to positive which will rebuild the CBRT’s credibility with investors. Turkey largely got into this mess, along with other reasons, by running years of overly loose monetary policy which has resulted in a low savings ratio, a wide current account deficit and persistently high inflation.”
Paul Greer, Fondsmanager für Schwellenländer-Obligationen, Fidelity International
