The EM market has been in standby mode with high uncertainties ahead of the US tariff announcement at 16:00 ET on 2 April. The EM market seems to have partially priced in the US tariffs, but there could be more market reactions when the details are released.
Moreover, a key area to watch following the announcement of US tariffs on 2 April will be any retaliatory tariffs or reactions that some economies take to try to negotiate down the level of tariffs. While the US tariffs and responses of EM peers would be the dominating factors in the near term, US non-farm payroll data on 4 April would also be on the watch list as EM market participants assess the resilience of the US economy. Meanwhile in Korea, we note that the decision on the impeachment motion of President Yoon Suk-yeol will be announced on 4 April, which would impact FX and KTB yields going forward.
Recent political events make financial stabilisation more difficult. However, we expect the financial stabilisation framework to remain in place.
We revise our inflation, interest rates and TRY forecasts (respectively upward, upward and downward).
The TRY remains under pressure, two weeks after Ekrem Imamoglu (mayor of Istanbul and Erdogan's main opponent) was taken into custody (alleged corruption and links with terrorism). The TRY has been stabilising, under the CBRT action, but the significant move in the FWD reflects a deteriorated outlook for the TRY.
So far, the CBRT has intervened to defend the TRY via interventions on the FX market. By 26 March, it had already spent USD25bn. It also tightened monetary policy, driving rates 350bp higher. Concretely, it raised the o/n rate to 46% and made the o/n lending facility the main financing facility, instead of the repo facility, the rate of which has remained at 42.5%. As a consequence, the average cost of funding has jumped from 42.5% to 46%.
This political move strongly hurts the hopes of some kind of normalisation of Turkey’s politics. Behind that, one of the main risks for the TRY is the possibility of Erdogan coming back to a heterodox policy, and asking for quick interest rate cuts. This would hurt the TRY (this has happened in the past). Such a shift could happen should Erdogan follow up, after this political action, with an institutional agenda. If Erdogan wants for example to organise a referendum to be able to run for another term as president after his current terms that is, for the time being, due to end in 2028, a more accommodative policy would be tempting in order to support growth and create a more favourable political backdrop.
This is a risk. This is not our base-case scenario, though. We expect the financial stabilisation framework to remain in place. In our view, reducing inflation will remain a key goal, also because elevated inflation has a significant political cost. There remains time to prepare for the next presidential election. And a continuing disinflation process would allow Erdogan to be in a better position to run again, and to change the constitution. This could occur in the course of 2026 or in 2027. Should the current economic policy be maintained, inflation could come close to single-digit territory by the end of 2026.
We revise our forecasts. We revise our inflation forecast upward. We now expect inflation to reach 28.5% at the end of the year, vs 24% previously. This puts our 2025 average forecast at 36%. We also revise our interest rate forecasts upward. We see the repo rate being kept stable at 42.5% until Q3. Assuming that the dust settles and that the orthodox financial framework remains in place, we expect the CBRT to move back to using the repo facility, and to be in position to gradually resume rate cuts. We expect the 1W repo rate to reach 33% in December 2025 (ie, real policy rate at 4.5%). We also revise our TRY forecasts downward. We expect USD/TRY to reach 41.2 at end-2025.
There are definitely strong risks to our scenario. To be monitored: (1) political/street protests, (2) a risk of dollarisation and the pace of depletion of FX reserves and (3) comments by President Erdogan on a possible political/institutional agenda.
Earlier today, the Monetary Policy Council (MPC) kept rates unchanged, with the NBP reference rate remaining at 5.75%. The status quo was in line with recent comments from NBP Governor Adam Glapiński, who, during the March press conference, stated that there are no grounds for changing interest rates. Similar views were echoed by NBP Deputy Governor Marta Kightley, who noted that the current level of rates is appropriate and that premature cuts could risk prolonging elevated inflation. A decision to hold rates steady would be in line with market consensus and, as such, should be neutral for both the PLN and Polish bond yields.
However, markets are likely to focus on Thursday’s press conference by the NBP Governor, which could provide further insight into the outlook for monetary policy. It is worth noting that Q1 headline inflation came in visibly below expectations outlined in the NBP’s latest projection. This lower starting point for inflation could introduce a slightly more dovish tone. Comments regarding the potential timing of future rate cuts will be particularly important. As a result, we expect increased volatility in the PLN exchange rate and Polish bond yields around the conference.
