The iShares MSCI Turkey ETF (NasdaqGM: TUR) is up more than 4% this month, but that barely dents the exchange traded fund’s year-to-date loss of more than 48%. Clearly, the only US-listed ETF focusing on controversial Turkish stocks has a lot of work ahead of it.
The same is true of Turkey’s economy, which is grappling with the effects of a slumping currency and rampant inflation. Earlier this month, the central bank there boosted interest rates by 625 basis points to 24%.
“This rate increase was a welcome and necessary first step towards exiting the ongoing Turkish lira crisis,” said Markit in a recent note. “The immediate market reaction was one of relief, with bond spreads narrowing and the lira rallying against the US dollar and the euro. The degree to which the TCMB increased the repo rate was a positive surprise, a more aggressive action to get in front of annual inflation than IHS Markit and many observers had anticipated.”
Turkey faced heavy pressure to raise rates as the lira has spiraled downward by more than 40% against the U.S. dollar. However, the latest efforts by the central bank appear to be steadying its value for the time being.
Lingering Concerns
Although Turkey’s recent interest rate hike is substantial, more steps are needed to get the economy there on firmer footing and regain investors’ confidence.
“It is important to note that this interest rate increase is only a bare minimum, first step to exit the current crisis. There is a high probability that the lira will once again begin to depreciate rapidly after only a temporary rally, potentially forcing the Bank to raise interest rates even further at later policy meetings,” according to Markit.
At the very least, Turkey’s central bank must keep rates high over the near-term and perhaps unveil additional rate hikes to further stabilize the lira.
“To rebuild financial-market stability, the Bank must, at a minimum, maintain these high interest rates for more than a month or two, while also taking other actions to maintain defensive monetary policy,” according to Markit. “Although President Erdoğan will continue to decry high interest rates, it will be important that he limits his opposition to rhetoric. Should these actions, or the resulting negative impact on domestic demand growth, trigger a more tangible push to find a scape goat by Erdoğan – perhaps an attempt to push out TCMB Governor Murat Çetinkaya or members of the Monetary Policy Committee or to impose penalties on the governor or the committee members – another currency crisis could develop as confidence in institutional integrity is once again undermined.”
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