Prime Minister Recep Tayyip Erdogan’s win in Turkey’s first direct presidential election could provide the political pressure for interest rate cuts, potentially promoting growth and lifting the stock market and related country-specific exchange traded fund.
Erdogan has been calling for interest rate cuts to stimulate economic growth after the economy is expected to slowed to 3.2% this year from 4% in 2013, reports Constantine Courcoulas for Bloomberg.
The iShares MSCI Turkey ETF (NYSEArca: TUR) has increased 15.1% year-to-date.
“Erdogan has been one of the big critics of monetary policy, urging the central bank to cut its key rates further,” Thu Lan Nguyen, a Commerzbank AG strategist, said in the article. “It looks like the central bank is caving into the pressure, which will obviously now persist.”
The lower interest rates would help support increased loans and economic activity. However, many market observers have warned about rising inflation and the potential need for tighter monetary policies to combat inflationary pressure.
Additionally, some are worried that a rate cut could weaken the the country’s currency buffer against volatile swings in the broader market, especially with weaker economic data coming out of Germany and ongoing tensions between Russia and Ukraine and violence in the middle east.
“Uncertainty regarding geopolitical impacts is a great concern for emerging-market currencies generally, in particular those which are in the region,” Nguyen added.
Meanwhile, Fitch Ratings argued that Erdogan’s win could fuel political risk in Turkey, which could also lead to a negative rating action. Erdogan is required by Turkish law to sever ties with his party as he takes the presidential mantle.
iShares MSCI Turkey ETF
For more information on Turkey, visit our Turkey category.
Max Chen contributed to this article.