Nicole Tung | Bloomberg | Getty Images Investors are bracing for another possible rate cut – or just a hold on the current rate – as Turkey refuses to follow economic orthodoxy in combating its soaring inflation, now over 80%.
Or, indeed, investors who may still be suspicious of Turkey’s market volatility. The 84 million-strong Eurasian hub – to which many major banks in Europe and the Middle East remain quite exposed, and which is particularly exposed to geopolitical tensions – has seen major market turmoil in recent days, on top of dramatic currency declines in recent years. This week has seen a lot of turmoil on Turkey’s stock market, Borsa Istanbul, with Turkish banking stocks down 35% in the week ended last Monday, after a stratospheric 150% rally from mid-July to mid-September. That prompted regulators and brokers to hold an emergency meeting, though they ultimately decided not to intervene in the market. The cause of volatility? First, Turkey’s high inflation had prompted investors to put their money into stocks to protect the value of their assets. But it was the fear of higher US inflation and subsequent interest rate hikes by the US Federal Reserve that likely triggered the sudden bearish turn, analysts believe. The fall wiped out more than $12.1 billion in market value from the nation’s publicly traded banks. Russian tourists to Europe fell dramatically over the summer, but increased in several other destinations, including Turkey (here). Onur Dogman | Sopa Images | Lightrocket | Getty Images This is because higher interest rates set by the US and the effect of a stronger dollar cause problems for emerging markets such as Turkey that import their energy reserves in dollars and have large dollar debts, and therefore will have to pay more for them . The market crash led to margin calls, when brokerages require investors to add money to their positions to offset losses on stocks they bought on “margin” or borrowed money. That sent the sell-off rising further until Turkey’s main clearing house, Takasbank, announced on Tuesday an easing of collateral payment requirements for margin trades. Bank shares and the Borsa as a whole recovered slightly on the news, with the stock market up 2.43% since Monday’s close at 2:00 p.m. to Constantinople. The Borsa Istanbul Index is still 73.86% YoY.

Soaring inflation: what next for the central bank?

But analysts say the positive stock market performance is out of step with Turkey’s economic reality as they look ahead to the Turkish central bank’s interest rate decision on Thursday. Faced with inflation just above 80%, Turkey shocked markets in August by cutting interest rates by 100 basis points to 13% – sticking to President Recep Tayyip Erdogan’s firm belief that interest rates will only increase inflation, contrary to with widespread economic principles. All this is happening at a time when much of the world is tightening monetary policy to combat soaring inflation. Country watchers are predicting another cut, or at most a withholding, likely to mean more trouble for the Turkish lira and the cost of living for Turks. Economists at London-based Capital Economics forecast a 100 basis point cut in interest rates. “It is clear that the Turkish central bank is under political pressure to adhere to Erdogan’s looser monetary policy and it is clear that Erdogan is more focused on growth in Turkey and not so much on tackling inflation,” said Liam Peach, senior economist emerging markets in Capital Economics told CNBC. “While the Turkish central bank is under such pressure, we believe they will continue with this rate-cutting cycle for perhaps another month or two … the rate-cutting window is small.” Timothy Ash, emerging markets strategist at BlueBay Asset Management, also predicts a 100 basis point cut. Erdogan will not need an excuse for this, Ash said, citing the upcoming election as the reason behind the move. Analysts at investment bank MUFG, meanwhile, are predicting a hold on the current 13% rate. Economists predict continued high inflation and a further fall in the pound, which has already fallen 27% against the dollar year-to-date and 53% over the past year. Erdogan, meanwhile, remains upbeat, predicting that inflation will ease by the end of the year. “Inflation is not an insurmountable economic threat. I’m an economist,” the president said during an interview Tuesday. Erdogan is not an economist by training. Regarding the effect of Erdogan’s decisions on the Turkish stock market, Ash said: “The danger of these unorthodox monetary policies is that they create misallocation of resources, bubbles, which eventually burst, causing great risks to macroeconomic stability.”