EMEA Weekly, Week 4

TCMB acts to curb lira sell-off
The still-unfolding corruption scandal in Turkey has put Turkish markets under very serious pressures - including the Turkish lira, which has plummeted. The lira had already been under some pressure prior to when the scandal broke. It is very clear that the lira sell-off is deeply worrying to both the Turkish government and the Turkish central bank (TCMB) and both institutions have moved to try to calm down the markets, but so far there has been little success and the lira remains very fragile.

As a consequence, we expect the TCMB to act to curb the weakening of the lira at next week's monetary policy meeting. Whether there will be an outright hike to the TCMB's key policy rate or some other measure taken is less clear, as in recent years the TCMB has become increasingly unorthodox in terms of its choice of policy instruments. Therefore, it has also been much less transparent. However, we are fairly certain that we will see some sort of policy reaction to prop up the lira next week. However, this has already been priced in by the markets to a large extent and rates and yields have shot up sharply in recent weeks.

MNB's baby-step cuts continue
This week, inflation data for Hungary in December was released. Inflation dropped to 0.4% y/y - well below the Hungarian's central bank's (MNB) official 3% inflation target. The extremely low inflation reading further confirms that Hungary is heading for outright inflation in coming months and as growth remains lacklustre and the forint relatively stable, there seems to be ample room for the MNB to cut interest rates further.

Recently, the MNB started cutting its key policy interest rate in baby steps of 20bp. However, it now seems as though it will cut in even smaller steps of 10bp at each policy meeting. This is also our expectation for next week's meeting. Looking further ahead, we expect the MNB to continue its rate cutting cycle to bring the key policy rate down to 2.0% in 12 months time.

To Read the Entire Report Please Click on the pdf File Below.