Jennison Market Review & Outlook 2021
Jennison shares their views on the current economic environment and outlook for 1Q 2021.
Turkey’s Path to Policy Credibility – So Far, So Good
Nov 24, 2020
PGIM Fixed Income's Jurgen Odenius, PhD, Economic Counselor of the Global Macroeconomic Research team, discusses the impacts of the decision by Turkey’s central bank (CBRT) to materially simplify its policy apparatus and raise its one-week repo rate by 4.75 percentage points to 15%.
At the first meeting chaired by newly appointed Governor Naci Agbal, Turkey’s central bank (CBRT) materially simplified its policy apparatus and raised its one-week repo rate by 4.75 percentage points to 15%. The statement makes it clear that all central bank financing will henceforth be exclusively provided through the main policy rate, which is the one-week repo rate. Since the central bank used to provide financing through several, different windows, its effective cost of funding—the weighted average over the various instruments—was at 14.8% going into today’s decision. In effective terms, today’s tightening therefore amounts to a 20 bps increase in the policy rate, raising a question as to whether more tightening may be needed.
Although this observation does not diminish the considerable benefits of the swift and extensive streamlining of the policy apparatus that was achieved today, it nevertheless raises the question whether the recent tightening will prove sufficient to stabilize the lira and rein in the looming macro imbalances. The honest economist answer, as so often is the case, is “it depends.” Inflation has been sticky near 12%, and it risks increasing further from here, as today’s statement also acknowledges: “The lagged effects of depreciation in Turkish lira, increasing international food prices and deterioration in inflation expectations affect the inflation outlook adversely.” We see inflation likely increasing to 13% early next year and possibly going higher from there. As a result, FX deposits have been rising at a brisk pace as households attempted to hedge against considerable lira volatility (Figure 1).
FIGURE 1: THE VOLATILITY IN THE LIRA HAS PROMPTED BROAD DOLLARIZATION IN TURKEY
The interest rate that banks pay on lira deposits ultimately drives households’ FX demand. Lira deposit rates are bound to rise from here, as they tend to closely follow the policy rate, shown in the Figure 2, given it is the average cost of central bank funding. Typically, dollarization has been reversed at real lira deposit rates of 3% or higher. Depending on the inflation trajectory, real rates may therefore fall short of what is needed to halt dollarization.
FIGURE 2: ALTHOUGH LIRA DEPOSIT RATES ARE POISED TO INCREASE, HIGHER REAL RATES MAY BE NEEDED TO STEM DOLLARIZATION
Going forward, the CBRT may have to tighten policy once more to maintain lira stability, once inflation rises early next year. To that end, today’s statement was unusually hawkish and suggests “… the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved.” Besides inflation, the statement also sets out benchmarks to assess likely improvements in the macro environment, suggesting: “The permanent establishment of a low inflation environment will affect macroeconomic and financial stability positively through the fall in country risk premium, reversal in the dollarization trend, accumulation of foreign exchange reserves and the perpetual decline in financing costs.” In other words, besides lowering inflation, the central bank is seeking a broad-based improvement in the relevant macro- and financial variables. So far, so good.
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This material reflects the views of the author as of November 19, 2020 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
All investments involve risk, including the possible loss of capital. Past performance is not a guarantee or reliable indicator of future results. Source: PGIM Fixed Income. The information represents the views and opinions of the author, is for information purposes only, and is subject to change. The information does not constitute investment advice and should not be used as the basis for an investment decision.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
PGIM Investments LLC is an SEC-registered investment adviser and a Prudential Financial, Inc. company. PGIM Fixed Income is a business unit of PGIM, a registered investment adviser. PGIM is a PFI company.
© 2020 Prudential Financial, Inc. (‘PFI’). PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide.
1042898-00001-00 Ed:11/2020
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