The second Monetary Policy Committee (MPC) meeting of 2012 will be held on Tuesday, February 21. We and consensus expect no change in policy rates or in other monetary tools. However, given strong portfolio inflows in January and significant easing in financing conditions, the CBT may let the banks keep a greater portion of TRL RR liabilities in FX, in order to accumulate FX reserves, in line with their guidance at the latest investor meeting in Ankara. Currently the upper limit is 40%, but according to the CBT, the banks are utilising 35% of this facility for the time being.
The CBT may also retain the key message in its statement; i.e. “tight monetary policy stance should be maintained for a while in order to keep inflation outlook consistent with the medium term targets”. Moreover, the monetary authority could underscore once again the merits of preserving the flexibility of monetary policy, through referring to adjustment of TRL funding via one-week repo auctions in either direction, depending on developments in credit, domestic demand, and inflation expectations. Furthermore, we know from the last Inflation Report that CPI forecast of 6.5% is based on the assumptions that tight monetary policy stance will be sustained for a while; annualised loan growth rate will hover at around 15%; and the Turkish lira will display a mild appreciation trend.
However, the CBT may also start building the foundations of an alternative scenario of “strong inflows”, implying a strengthening in capital inflows to Turkey after the January FOMC decision, ECB’s LTRO, and new additions to QE by BoJ and BoE, though this may not necessarily be mentioned in the brief statement to be published after the MPC meeting. If this does turn out to be the case, however, it would be the exact opposite of the market conditions (outflows/weak inflows) that prevailed within October-December 2011. Note that the CBT has shared its possible monetary and macroprudential reactions for both cases in previous presentations.
Therefore, we expect the CBT’s responses to strong capital inflows to be in the form of 1) FX purchase auctions; 2) reducing the lower bound of the interest rate corridor to gain flexibility to ease monetary policy; 3) RRR hikes or at least a stable RRR level. H
owever, we think the CBT will not be in a hurry to switch to the aforementioned alternative scenario, since it seems content with some further appreciation of the TRL and would probably like to be sure about the permanency of capital inflows. Moreover, the pace of loan growth will be of utmost significance concerning this decision. The CBT has been indicating that annualised loan growth rate (FX-adjusted) at around 15% is reasonable for the inflation target. Therefore, the CBT will continue to observe whether the recent trend is in line with the explicit target and react accordingly.
When we look at the recent loan figures, interestingly we see divergent trends in consumer loans and total loans. According to weekly loan data from the BRSA, FX-adjusted (fixed rate, fixed parity) yoy growth is similar to the previous year-end (23-24%) and trend-growth (annualised 13-week average) of FX-adjusted loans still remains in the range of (10-12%) as of February 3. However, the trend indicator for consumer loans that the CBT is following (annualised four-week moving averages) stands at 2%, significantly below the related figures for 2011 and for the average of the 2006-2010 period. We attach greater significance to the trend in total loans, and low consumer loan growth does not seem disconcerting to us, since it is supportive for re-balancing of domestic and external demand. Therefore, we think the recent trend is in line with the explicit target. This implies an unchanged monetary stance and funding cost for the time being.
However, three scenarios are possible for the near future: 1) If loan growth remains roughly around 15% -- as it has recently -- the CBT will maintain the funding cost at its recent level (7.5%), but seriously consider launching FX purchase auctions in case of appreciation pressure on the TRL due to capital inflows. 2) If loan growth dips clearly below 15%, the CBT might adjust the parameters (lower and upper limits for the amount of 1-week and 1-month repo) of the interest rate corridor to ease the funding cost to below 7.5%. 3) Conversely, if loan growth climbs significantly above 15%, the CBT will maintain higher funding costs and even consider higher RRR.
As we review the economic outlook that sets a backdrop to the expected developments in monetary policy discussed above, the most crucial piece of fresh news seems to be the estimate-topping industrial production (IP) reading as of Dec’11. We expect the comparative heftiness of the YE11 IP level -- hence the level at which it starts the new year -- to induce upward revisions to 2012 growth estimates. Investors will recall that industrial production rose by 3.7% yoy in Dec’11, exceeding market consensus of 2.3%. More importantly, seasonally-adjusted (SA) IP jumped to a record-high 131.5 in Dec’11, 8% above the pre-crisis peak in 2008. Since the original series of the IP tend to be more volatile and sometimes misleading, we opt to use IP (SA) figures to construct different scenarios for economic activity. Although there are differences between the two series in mom comparisons, the results should be the same in yoy comparisons. Therefore, barring a permanent break in IP (SA) series, the current stronger path suggests enduring growth in IP, the most important leading indicator of GDP. That is why we flagged a probable revision to our GDP growth forecast towards 3.5-4% from 2.5%, immediately after the data announcement.
Consequently, we revised our 2012 GDP forecast to 4.0%, as part of our base scenario envisaging around 2.5% sequential contraction in IP (SA) for 1Q12, to be followed by c.3.5% recovery until the year-end.
We also present here our two alternative scenarios, in order to show what could lead us to make new revisions. 1) Bad case: Around 4.5% sequential contraction in IP (SA) in 1Q12, to be followed by around 2.8% recovery until the year-end – consistent with around 2.5% yoy GDP growth in 2012; 2) Good case: Around 2.5% sequential contraction in IP (SA) in 1Q12, to be followed by around 6% recovery until the year-end – consistent with around 5% yoy GDP growth in 2012. We also need to underline the fact that upward revisions to Eurozone growth in particular or global growth -- as has already been the case recently by some global investment banks -- would be supportive of our above-consensus GDP forecast -- and even our good case scenario.
Accordingly, we have tweaked our other macro forecasts in line with changes in our GDP forecasts. Additionally, it is worth underscoring that recent data point to growth that is driven more by investment and external demand than consumption demand. For example, while 4Q11 import quantity index contracted by 1.8% with respect to the same quarter a year ago, export quantity index expanded by 5.8%. Leading export readings (Turkish Exporters’ Assembly (TIM)) as of the early months of the year and leading indicators of consumption (automotive sales and CNBC-e consumption index) also seem to suggest a continuation of this trend. While we consider this new composition to be healthier and more constructive for the sustainability of growth, we also believe it should help accelerate a balancing of internal and external demand.
In conclusion, the CBT is once again likely to indicate that a tighter monetary stance remains warranted for some time and it will continue to respond to potential shocks with the interest rate corridor policy. Additionally, the monetary authority may emphasize that in the event that it becomes more confident of the sustainability of strong capital inflows, which have been evident as of the start of the year, it might initiate steps to enable FX reserve accumulation, such as scaling up of the permissible amount of TRL RR kept in FX, and launching FX purchase auctions. As for the direction of the funding cost that has long been hovering at around 7.5%: it will continue to hinge primarily on loan growth, and to a lesser degree on signals from economic activity and inflation.
