Chaotic politics, stagnant economy
The macro context has become palpably more stagflationary over the past few months, with economic activity stagnating but inflation remaining elevated -- and we expect things to stay this way for the foreseeable future. But this should be no threat to the proverbial “carry trade” -- the only thing that investors and much of our audience seem to care about these days – as long as the CBRT does not make the policy mistake of easing prematurely (and of course, barring black swans).
Given elevated political risk premia and the need to accelerate the pace of USD/TL depreciation, which is already happening, we continue to think relatively elevated real rates will be the price to pay to maintain this “unstable equilibrium”. This, combined with a more challenging balance of payments dynamic compared to the past few years, suggests that in reality there is not much room for the CBRT to lower the policy rate, even though it will be itching to do so.
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The key macro question continues to be how long this “muddle through” – or the CBRT’s USD/TL policy more specifically -- could continue. With snap elections most likely out of the way in the near term, “probably quite a while longer” is our answer for now, though we are cognizant that things could get materially more complicated, driven, for instance, by a surge in locals’ demand for F/X as elections approach.
Now read on...
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