Saturday, February 19, 2011

The promised addendum on this week's Hurriyet column

I am already starting to think about this week's column, and will probably get it done today so that my editor friend can edit it for me tonight or tomorrow morning (I exchanged my Besiktas pass and a couple of other perks for her editing services in the spirit of good old barter, but before the Kiev game, so it wasn't an act of resignation), but the addendum to the latest column is finally here:

First, as you all probably know by now, the CBT left the policy rate constant, allowing my Daily News and Roubini readers make use of my good call. If you want to know the details, Citi Turkey economists have them, but what captured me most was the emphasis on demand and supply-side inflationary pressures at the same time: Not only did the Bank add in supply-side pressures ("the Committee also notes that rising energy and other commodity prices pose supply side risks on the inflation outlook"), it also got rid of a phrases noting lack of domestic demand pressures ("industrial capacity utilization rates remain below their pre-crisis levels due to weak external demand" and "aggregate demand conditions do not exert upside pressures on inflation"). Anyway, if you want to do your own comparison, here's the MPC one-pager from this month and the last....

The constructive ambiguity the Bank has created of late was evident before the decision, with economists evenly split between a cut and and no cut. Radikal had a terrific piece the day of the rate decision, where the economists they interviewed were giving completely conflicting views on the market impact of the decision: Some were saying a cut would affect markets negatively, while others were arguing that lack of a cut would lead to a negative market reaction. At the end of the day, there was a positive market reaction right after the cut, but most of it was taken back before day's close, owing partly due market-negative US data.

More importantly, what is next for the CBT? I find it unlikely that, unless there are very unexpected events, like reemergence of capital flows to EMs, the Bank will cut rates again, given the inflationary pressures and that it has succeeded in curbing hot money (BTW, hot money flows re measured completely mistakenly by many, so I will have something to say about that later). In this sense, I think Emma Hanim, as a reader critically referred to FT Money Supply blogger Emma Saunders, has got it wrong again. But unless there are unexpected events, like those in May-June 2006, which prompted the Bank to a sudden hike, the CBT will not raise rates before July, either, given that the new governor is appointed in April and that there are general elections in June.

But that doesn't mean the Bank will just sit and wait until after the elections. As Juan el Bebe noted in a recent speech, as summarized by J.P. Morgan, the government likes the CBT's line: Sit and wait to see the impact of the measures on credit, and act if they are not enough. As I argued in the latest column, I don't think they are enough- although I only have semi-formal evidence to support my claim- incidentally, I recently saw a BRSA paper that finds, more or less, the same relationship between interest rates and credit growth as I only halfheartedly reported. I still haven't gone through the full calculations (and doubt ever will, given lack of incentives and too much to do in my moonlighting job), but I wouldn't be surprised even the Bank would need a couple of percent of RRR hikes at the very least, as well as some other macroprudential measures, to curb credit for good. Babacan hints that if that is the case, support from the BRSA will be coming.

As for making use of this scenario: There are many, let me name a few: 
  • You could see banking stocks (and therefore ISE) go down when the measures are enacted. The only problem is the difficulty of timing, so I have not put this prophecy to use for myself yet.
  • If you want to restructure a loan or mortgage, these may be the last few weeks to do so (I am actually going through this right now, so I am putting my money where my mouth is)
  • Any bet on lira strengthening during the second half of the year is a good bet: You could do options if you have a lot of money, forwards/futures if you have some or dual-currency deposits of you have little. If you want to know you are getting fair pricing, open up any finance book and calculate no-arbitrage pricing, or ask a trader, as I did last week. With this, I am putting my money where my mouth is as well.
Finally, for the interested who speak Turkish, I wanted to hyperlink an Ugur Gurses column in Radikal: Mr. Gurses makes the argument that the CBT measures are not to deter hot money, but keep the existing in before the elections, to avoid a severe external shock. You may not buy it, I am not sure if I do either, but it is an interesting read nevertheless.

That's all folks, but a related post titled "the best charts to see impact of CBT's policy" will be with you soon....

1 comment:

Anonymous said...

WoW, first time I see you giving investment ideas, I hope you are not evolving into a "market" economist. :)

Abe Rudder