ANKARA: Turkey’s local-currency bonds, already the worst performing emerging-market debt, may post further losses as inflation accelerates and the central bank’s ability to respond is constrained by politics.
Powered by rising food prices, inflation climbed to 7.9 percent in April, exceeding economists’ estimates. The lira weakened and the yield on two-year government bonds surged near a one-year high after the figures were released on Monday.
Turkey’s central bank, set to miss its 5 percent inflation target for a fourth year, is under government pressure to bolster a slowing economy in the run-up to elections in June. Governor Erdem Basci said April 30 that the worsening inflation outlook didn’t require tighter policy, reinforcing speculation that he won’t raise interest rates for now.
“Turkish bonds won’t find any support from inflation,” said Yeliz Karabulut, vice general manager at Alan Menkul Degerler brokerage in Istanbul.
As recently as January, Basci was holding out the prospect of steeper rate cuts to accelerate the bank’s easing cycle. Instead, he stopped cutting rates after the bank’s February meeting, as Turkey’s currency and bonds plunged. The bank last week raised its year-end inflation forecast to 6.8 percent from 5.5 percent.
Policy Response
The lira strengthened 0.1 percent to 2.7111 per dollar at 12:24 p.m. in Istanbul, trimming the year’s losses to 13.9 percent, the biggest drop among the 31 most actively traded currencies tracked by Bloomberg, along with Brazil’s real. Basci said April 30 he wouldn’t “provide a policy response” based solely on the value of the lira.
The governor’s remarks last week diminished expectations that he might increase borrowing costs before the election on June 7, said Deniz Cicek, an economist at Finansbank AS in Istanbul. “Yields on two-year bonds would go up if the market expected a rate hike whereas longer-term yields would probably fall,” Cicek said.
The yield on two-year notes has risen 223 basis points this year, reaching 10.25 percent on Monday. The yield on 10-year bonds rose 144 basis points since the beginning of the year to 9.46 percent on Tuesday. Both are this year’s worst-performers in emerging markets, according to data compiled by Bloomberg.
Although a rate increase after the elections is possible, policy makers will be walking a fine line between bolstering the currency and supporting economic growth, Karabulut said. Until then, the bank will keep borrowing costs on hold, which will probably lead to a further deterioration in inflation expectations, she said.
