Financial markets applauded the Monetary Policy Committee (PPK) of the Central Bank of Turkey (TCMB) Thursday on news of its decision to cut interest rates by 50 basis points. Although this was a development I had expected and written about three weeks ago, it apparently took the market by surprise.
The benchmark BIST-100 index and fixed income securities were up across the board as higher interest rate paying bonds were in demand. Positive news continued to come to markets on Friday as the TCMB's "Business Tendency Survey and Real Sector Confidence Index" was up to 113.3, its highest level in two years.
Impending news of quantitative easing out of the ECB has already weakened the Euro against the Turkish Lira, down 11 percent since it's January 24th yearly high, and any decision on monetary easing by the ECB would prompt a flight to higher yielding debt securities such as those issued by the Turkish Treasury. The TCMB appears to have responded by lowering rates ahead of any ECB action. In last month's TCMB disclosure, the central bank's chairman, Erdem Basci, noted he expected the temporary inflationary shocks brought on by the Dec. 17 political crisis to work their way through the economy by June and for inflation to stabilize thereafter. Both developments implied an impending rate cut this month, to the astute observer, and markets were given one.
Following the municipal election results, political stability has returned and financial markets have reacted accordingly. The results of the elections point to a win by the incumbent AK Party in this summer's presidential election, easing worries of gridlock in Ankara. The dissipation of inflation coupled with the return of financial stability would have made reiterating current interest rates impossible for the policy makers at the PPK to justify. Essentially it was only a question of which tool the TCMB would use to signal lower rates, in this case the one week repurchasing, or repo rate, was lowered from 10 percent to 9.5 percent, while the borrowing and lending rates were kept stable at 8 percent and 12 percent respectively.
The benchmark BIST-100 equity index jumped from a pre-announcement level of 76,737 to 78,043 by the close of trading Thursday. Markets traded unchanged Friday and closed off the week up near 4 percent.
In fixed income markets, both the longend 10-year bond and the benchmark twoyear were up substantially as their yields fell to 9 percent and 8.6 percent on heavy trading following the central bank's decision. The same treasuries traded at 9.24 percent and 9.02 percent one week ago and at 9.16 percent and 9.42 percent on May 6, the day I had predicted the cut and a 25 basis point drop in yields by Thursday, both of which occurred before the rate-cut announcement was made.
Insurance against political and economic instability in the form of Credit-Default Swaps, or CDSs, traded at 1.81 percent Friday, down 0.04 percent from last week's 1.85 percent level.
The Turkish lira continues to trade in a relatively tight pattern, trading at 2.081 Turkish liras to the dollar, up from the 2.092 liras to the dollar it was trading at a week ago. The Central Registry Agency's (MKK) foreign participation in Turkish Equity's index sits steady at 63.6 percent down slightly from its level of 63.7 percent last week.
The Consumer Confidence Index will be released on Tuesday followed by the current account deficit numbers on Friday. No major surprises are expected in either announcement. The earthquake that took place on Saturday in the Aegean, continued to shake the region on Sunday with several smaller aftershocks but this natural disaster should not shake financial markets.
Presidential election campaigning will move into high-gear next month as both the government and opposition parties nominate their candidates. Barring any major surprising events between now and then, markets should continue to react positively in the mid-term.
Keep up to date with what’s happening in Turkey,
it’s region and the world.
You can unsubscribe at any time. By signing up you are agreeing to our Terms of Use and Privacy Policy.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.