WOOD Flash – Turkey macro: strong growth dynamics reduce the appetite for rate cuts

The incoming data suggests that GDP growth for 2Q21E (due next week) is most likely to be in the range of 22-25% yoy, in our view. This implies annual growth of 9-10% for the year. In the background, this is the result of not only strong base effects, but also a robust 2021E performance.
This level of growth carries significant implications for inflation, rates, and the TRY. First, it confirms a pro-inflationary demand-pull effect on top of the still-persisting supply-side friction and stands in line with our inflation estimates of 17% aop in 2021E and 14% in 2022E. Second, it makes rate cuts less urgent, if not for pure ideological reasons, postponing them into 2022E. As a result, we see no cuts in 2021E and a 400bp reduction to 15% by end-2022E (vs. consensus of 650bp to 12.5%). We argue that a lot depends on growth momentum, but that stronger cuts are not sustainable until there is some progress in anchoring inflationary expectations. Third, together, these moving parts are consistent with temporary TRY stability. In fact, a tighter monetary policy for longer, a good performance from net exports, a recovery in tourism, and gold imports on a declining trend, should help the current account (CA) in the coming quarters. We thus expect temporary stability in the first months of the autumn, bearing in mind that our fair value model keeps signalling a 8.9 USD/TRY in 2021E and 9.6 for 2022E eop.