Türkiye ‘back in the game’ with lira carry trade: Goldman Sachs

A top Wall Street bank has said it expects real interest rates to turn positive by the end of the year and predicts a potential revival of Turkish lira carry trade as Ankara continues its overhaul in economic policymaking.

Analysts at Goldman Sachs on Thursday said Türkiye’s accelerated path toward rate normalization continued last week, as the country’s central bank delivered another sizable interest rate hike to rein in stubborn inflation.

The policy shift from a yearslong easing cycle after President Recep Tayyip Erdoğan’s reelection in May has seen the country’s central bank triple its benchmark one-week repo rate to 30%.

The bank has vowed readiness to raise rates further if needed to curb inflation, which shot back to nearly 60% in August.

Erdoğan has publicly expressed his backing for the aggressive monetary tightening that seeks to cool inflation, rebuild foreign currency reserves and curb the chronic current account deficit.

In a report titled “Türkiye is back in the game,” Goldman Sachs said real rates in Türkiye, still deeply negative despite the rate hikes, were on track to turn positive by year-end. Adjusted for the future inflationary outlook, real rates currently stand minus 29%.

The report highlighted a shift in Türkiye’s economic approach and said the recent increase in policy rates suggests that deposit rates are likely to increase further, noting “support of a positive real rate strategy,” in sharp contrast to previous years, although implementation risks remain.

The report emphasizes the renewed determination of the economic administration to provide positive real interest rates, saying it may now be possible to “beat the FX depreciation reflected in forward pricing” and that carry trade in the lira could be “back in the fray.”

Goldman Sachs says a policy interest rate of 40% or above by the end of the year would bring Türkiye’s real rates into positive territory, given that it would surpass the inflation forecast for the next 12 months.

Such a trend would reignite interest among foreign investors, including carry trade enthusiasts. Carry trade is a strategy where investors borrow money in countries with low-interest rates to invest in a currency with higher returns.

The lira has weakened more than 30% against the United States dollar this year and traded at 27.42 per dollar on Friday.

Analysts at Goldman Sachs forecast that the currency would trade at 28 and 29 against the dollar in three and six months, respectively, stronger than the levels in the forward markets, at approximately 30 and 33.