TCMB set to cut again, SARB on hold

TCMB continues to cut

Earlier in the year, the Turkish central bank (TCMB) hiked interest rates aggressively to curb the freefall in the Turkish lira. However, since then the lira has stabilised and the TCMB has started to ‘normalise’ rates. We saw the latest rate cut a month ago and we expect the TCMB to continue the rate-cutting cycle next week. We believe it is justified given continued relatively weak growth in the Turkish economy and the fairly strong lira but it is also notable that inflation remains well above the TCMB’s official 5% inflation target and it is likely to be concerned that too aggressive a rate cut could put pressure on the lira. So, even though the Turkish government has put considerable pressure on the TCMB, we expect only a 50bp cut to 8.25% – in line with consensus.

SARB stays on hold

The South African central bank continues to face conflicting policy choices. While inflation continues to rise and is above the inflation target range of 3-6% at this time, the South African economy continues to struggle as economic activity is hit hard by strikes in the mining sector. The economy slumped in the first quarter of this year, contracting 0.6% q/q from 3.8% q/q in Q4 13. We expect the South African economy to expand by only 1.9% (the same as GDP growth in 2013) but the risk is on the downside if strikes remain unresolved. Despite weak growth, inflation hovers above the inflation target and in June we expect inflation to rise further, to 6.9% y/y, up from 6.6% y/y in May. This is something with which the South African central bank is clearly not comfortable. Some of the SARB’s MPC members, but also SARB governor Gill Marcus, have said that interest rates have to go up to curb inflation.

Even though inflation remains elevated and above target, we think the SARB will wait to hike interest rates and believe that concerns about the weak economic growth outweigh inflation concerns. Therefore, we expect the SARB to stay on hold, maintaining the key policy rate at 5.5%. However, we also acknowledge that inflation is uncomfortably high and some MPC members will favour a rate hike at next week’s MPC meeting.

Only minor changes to our EMEA FX forecast

As we do not intend to publish Emerging Markets Briefer this month, we have made minor adjustments to our EMEA FX forecast. Hence, we have changed our three-month forecast for both the PLN and HUF in a slightly more negative direction due to recent weakness, mostly reflecting uncertainty about Hungarian banking legislation. Overall, we maintain a fairly positive view on the forint on a 6-12 month horizon and have left our HUF forecast over this horizon unchanged. We forecast EUR/HUF at 315, 305, 305 in three, six and 12 months respectively and we forecast EUR/PLN at 4.10, 4.10 and 4.15 in three, six and 12 months respectively.