The Central Bank of the Republic of Turkey (CBRT) raised the policy rate by 500 basis points to 40.0 percent at the November Monetary Policy Committee (MPC) meeting. The announcement indicates that the Central Bank will take a smaller step in December and make a final increase of 250 basis points.
Turkish lira asset markets are generally upbeat after the positive surprise from the Central Bank. The Turkish lira is appreciating against the dollar, while medium-to-long term Turkish lira bond yields are declining.
There is a mixed course in Borsa Istanbul. While interest and growth sensitive stocks such as white goods, real estate and automotive are declining, stocks such as banks and insurance that benefit from the end of financial repression are gaining value.
As economists, our reaction is positive. The war in the Middle East and signs of a slowdown in the economy gave the Central Bank an excuse to scale back the interest rate step. However, inflation realization and expectations were telling us that “there was still a long way to go”.
The Central Bank had an important opportunity to anchor inflation expectations and correct deteriorating pricing habits by positively surprising the markets.
Following the Central Bank’s hawkish statement, we raise our end-2023 policy rate forecast from 40 percent to 42.5 percent. We expect the Central Bank to raise the policy rate by another 250 basis points in December in order to correct deteriorating pricing habits and lower 12-month inflation expectations of around 45 percent. Provided that inflation remains in line with the targeted path, in the last quarter of the next year, the policy rate may be cut by 250 basis points.
The Central Bank’s hawkish move supports our positive outlook for the Turkish lira, short- to medium-term Turkish lira bonds and medium- to long-term eurobonds. We reiterate our call to increase the weight of Turkish lira assets in portfolios.
We believe that the negative reaction of the stock market is temporary. We believe that the normalization of monetary policy is part of the rationalization of economic policies. In this process, the country risk premium will decline and the value of country assets will increase. High-beta stocks will naturally gain value in this process.
The transition to inflation accounting and taxation of non-financial companies on adjusted figures undoubtedly complicates this process.
Companies with a negative net monetary position, whose profits will increase due to the inflation adjustment, will have an increased tax burden in 2024-2025. Companies whose profits will decrease due to inflation adjustment will have a lower tax burden.
We do not know how the market will react to this regulation. Should we buy companies whose profits are increasing, or should we sell them because their taxes are increasing? We read both the profits increasing due to inflation and the profits decreasing-increasing due to inflation accounting at a discount.
On the other hand, we care about tax figures. Disregarding the profit and loss calculated on the basis of inflation accounting for financial companies is a regulation that lowers bank and insurance valuations.
We do not change our inflation and exchange rate forecasts after the interest rate decision. Our 2023 year-end USD exchange rate forecast is 30.00 TRY and 43.00 TRY for end-2024. Our inflation forecast is 67% for end-2023 and 42% for end-2024.