· Currency protected deposit, foreign exchange demand
· Macroeconomic balances, inflation pass-through
In the current economic perspective, the aim of keeping interest rates low and supporting exports brought the Central Bank's rate cuts, which caused the lira to wear out continuously. With the FX-protected TRY deposit product, which was launched at the end of December in order to stop the decline of the lira, which displayed a very discrete image with its depreciation of more than 40%, an application was developed based on compensating for the losses caused by the depreciation of the lira, and with this, the attractiveness of the lira was sought to be increased.
Inflation, which increased by 11.1% on a periodic basis in January, sent annual inflation to 48.7%. We think that the exchange rate pass-through and the transition from PPI to CPI will be the main themes of inflation, especially since the PPI that rose to the level of 93.5% with the previous period's commitments and the changing economy profile suggest lower real interest rates, especially with the effect of the transitions originating from the exchange rate on the import costs. The fact that oil prices, which rose with geopolitical tensions, exceeded the level of 90 dollars for the first time after 2014, increases the energy bill and reduces the contribution of net exports.
Comparison of CBRT policy rate and CPI inflation Source: Bloomberg, CBRT, TURKSTAT
This situation in energy prices creates an adverse risk for the economic purpose related to the current account surplus and puts pressure on the foreign trade deficit. According to the leading data, in January, an external deficit of over 10 billion dollars was realized, and a significant part of this was due to the effect of energy prices. The determining effect on the energy side, which is the item on which we are most dependent on foreign imports, will be monitored due to the double-sided price effect. The double-sided price effect is realized primarily through the effect of global prices (geopolitical, political, supply and demand-based commodity pricing), and then the exchange rate effect (the depreciation of the TRY).
The CBRT did not make any rate cuts in January. In monetary policy, the difficulties to be created by the increasing inflation in the current structure are obvious. We expect the lira to struggle in this negative real interest concept, assuming that the Central Bank will move towards economic targets such as growth and current interest rates, rather than responding to inflation by increasing interest rates. We think that price stability, which must be observed in terms of controlling inflation, will be desired to be achieved with currency-protected deposit products and similar financial instruments that guarantee to meet the deficit in case of a further increase in bank interest rates. We do not expect any interest rate changes from the Central Bank on February 17.
In terms of inflation expectations, we think that ensuring the stability of the lira is an important criterion. In the first quarter, we expect the CPI to continue its upward momentum, peak towards the middle of the year and decline towards the last months due to the base effect. Components such as exchange rate pass-through, minimum wage hike and production and operating costs increased by commodity prices, the effect of deteriorating inflation expectations on pricing behavior, and central taxation policies stand out in risks to increase inflation.
While it is understood that TRY interest rates will not be increased in line with the main policy, with the current guidance, the phenomenon that comes before us is the exchange rate, gold and inflation-protected financial products that were introduced to encourage TRY investment. After the introduction of the currency protected deposit product by President Mr. Recep Tayyip Erdoğan on 20 December and the implementation principles set forth thereafter, it was announced that there was a total of 78 billion TRY turnover. Minister of Treasury and Finance, Mr. Nureddin Nebati has announced that similar financial instruments protected against inflation will be developed. In this context, we will observe to what extent the TL investment attractiveness will be shaped. However, the wave of uncertainty in inflation still continues to be a serious concern.
Fed Effects in Emerging Markets
· Factors that differentiate EM rates
· Return position and adaptation movements to financial conditions
The fact that the central banks' policy tightening signals point to a more aggressive image reduces negative bond stocks and increases interest rates in developed countries in the world. The fact that the concerns about inflation force Central banks to tighten monetary policy earlier and more frequently will be determinant in factors such as financial markets, portfolio movements and capital cycle in the coming months. Within this EM profile, we will look at risk factors for vulnerability and real return factors for investment.
President Mr. Erdogan's unconventional economic approach and the doctrine that interest rates are the trigger for inflation form the basis of his goal of creating low borrowing costs. We think that the fact that the main policy rate will not be used for price stability creates a certain level of risk. With a real interest rate of -34.7% of the currency, it is more vulnerable to internal and external flows.
Return positions of developing countries adjusted for inflation (Policy rate-inflation=real interest) (Source: Bloomberg)
The continuation of the high course of inflation and the fact that increasing US yields will probably continue this trend throughout the year within the framework of the tightening of the Fed shows that EMs will consider the positive real return factor. While Russia has increased its policy rate above inflation with the latest interest rate hikes, we expect similar moves from countries such as Brazil, Mexico and South Africa. Turkey, on the other hand, will be on the other side of the equation on the exceptional side. The Fed is expected to hike rates at least 4 times this year, after the Fed made it clear on January 26 that broad US growth, strong labor market and high inflation would enable the Federal Reserve to tighten its most aggressive monetary policy since the 1990s. We think that the emerging market markets are prepared with this effect by front-loaded tightening, while countries such as Turkey have a high risk profile.
Central Banks Take the Main Stage
· Aggressive rate hikes
· Balance sheet reduction attributes
· Economic concerns in the developed world
Complete turmoil in supply chains is the main driver of inflation. In this environment, it is normal that the Fed does not hesitate to tapering due to increasing inflationary pressures. It is important to remove the bottlenecks in terms of growth outlook and inflation outlook, as the anti-inflationary factors will also be positive for growth at this stage. Consumer demand is supported by the increase in revenues. However, it is understood that inflation still poses a challenge for SME-style businesses and wage earners.
Comparison of US 2 - 10-year bond yields, US CPI and German 10-year bond yields Source: Bloomberg
The Central Bank's determination and willingness to tighten, understood after Powell's speech at the FOMC, has caused long-term interest rates to rise in the US recently. It remains unclear how many times a Fed, which has introduced the concept of fighting inflation, will raise interest rates 4 or 5 times or more this year. In the real tightening concept, there is concern that the Fed will go beyond this scale.
The inflation situation did not improve compared to last year, it got worse. The Fed will normally keep disinflation a priority, especially if it also takes into account the overarching impact of inflation on low-income groups. The impact of inflation on low-income consumers is more pronounced for certain items such as food and rent. At this point, the distorting effect of inflation on the economic situation of households emerges.
Specifically, the FOMC is expected to raise 125 basis points by the end of the year and announce the start of the balance sheet reduction at its June 15 or July 27 meeting. In the policy meetings to be held on March 16, May 4 and June 15, there may be definite interest rate hikes. We assume that the rate of increase in these meetings will be 25 basis points. As a result, a faster monetary tightening than in the previous cycle seems appropriate today.
We expect the Fed's balance sheet cuts to put upward pressure on interest rates. The Fed will not only reduce Treasury holdings, but will also shrink its mortgage-backed securities profile. We expect the 10-year Treasury yield to rise steadily for the remainder of this year and remain in the 2.25% - 2.50% range for most of 2023. Strong economic activity, labor or inflationary data from the United States would raise the possibility of a 50 basis point March rate hike.
The Bank of England made a hawkish monetary policy announcement, raising the policy rate by 25 basis points, with some policymakers even opposing in favor of a larger move. Given the hawkish announcement, the Bank of England will now be expected to raise rates more and sooner than before. The European Central Bank kept its monetary policy steady, but signaled that it would reassess its policy outlook in March, saying inflation risks are on the upside. Markets, on the other hand, are ready to price the rate hike more steeply. At the point of economic flexibility and proactivity, the image of Fed > BOE > ECB is very likely. It should also be taken into account that the ECB prefers smaller scales instead of traditional bands in interest rate movements.
Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı