Turkey: Policy reaction of the CBT to be key for the markets - ING

According to Muhammet Mercan, Chief Economist at ING, a less supportive global backdrop with US dollar strength, geopolitical issues and macro imbalances have been factors that have shifted the focus to Turkey in emerging markets.

Key Quotes

“With significant volatility in domestic financial markets pulling TRY to the lowest level since the 1994 crisis in REER terms, and bond yields to the highest since the global financial crisis.”

“Given the large FX debt service requirement of the economy- as overall external financing needs remain high with low reserve adequacy- the authorities should be quick to act with credible measures to restore confidence.”

“Accordingly, the policy reaction of the government and the central bank will be key for the stabilisation of domestic financial markets.”

“The MPC took no action in July due to a moderation in economic activity with milder demand conditions and as it awaited the lagged impact of earlier policy tightening and fiscal policy measures.”

“But we expect the CBT to deliver this month by hiking the policy rate to 21%, with a measured recalibration of monetary policy in a response to the ongoing weakening in the currency and further deterioration in the inflation outlook.”

“We also expect the bank to maintain its commitment to deliver more policy action after the release of the MTP to help restore confidence.”