As expected, Central Bank of Turkey cut rtaes by 250 bais points, signaling another cut in March. PA Turkey surveyed three institutions to find out how far CBRT will go in this loosening cycle:
Gedik Investment: The easing cycle may continue with 250-basis-point reductions over the next three meetings
CBRT cuts the policy rate to 45.00 from 47.50%. At its January MPC meeting, the CBRT lowered the policy rate by 250 basis points to 45.00%, in line with market expectations. This brings the total rate cuts over the past two months to 500 basis points.
The easing cycle may continue with 250-basis-point reductions over the next three meetings. We think that there were no surprises in the accompanying policy statement, as the rate decision. The CBRT basically continues to say that it will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook and maintain the policy tightness (despite rate cuts). One notable change in the policy statement was the adjustment of language regarding inflation. To be specific, the phrase that “The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected range” was replaced with “The tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation.” This adjustment likely reflects the CBRT’s intent to strengthen its emphasis on monetary tightness while signalling a shift towards basing rate decisions on annual inflation rather than monthly trends.
In our view, as we previously highlighted, the CBRT could maintain monetary tightness with a policy rate approximately 300–400 bps above the prevailing inflation (or its expectations for the following month). We anticipate CPI inflation to decline to about 37% by the end of Q1 and to 33-34% by mid-year (assuming the current exchange rate trends will persist), which makes 250 bps rate cuts over the coming 3 MPC meetings plausible, bringing the policy rate to around 37.50% by June. Recall that the upcoming MPC meetings are scheduled at March 06, April 17 and June 19.
In the second half of the year, the pace of rate cuts could slow in parallel with a more gradual decline in inflation.
The CBRT likely to announce new sterilization measures. The CBRT’s net reserves (excluding swaps) have risen significantly y-t-d, nearing USD16 billion as of last week, driven by strong FX inflows. While these inflows have been helping the currency stability, they have also been leading to excess Turkish Lira liquidity, which currently exceeds 1 billion TL, a record level. The CBRT today, as to be expected, has also indicated that sterilization tools will be used effectively and that “additional measures” will be implemented. In this context, we may see new steps such as hikes in required reserve ratios for Turkish Lira deposits and/or the issuance of long-term sterilization instruments (such as 3-month liquidity bills) in the coming days.
ING: Terminal rate 27.75%
Given benign December data and the economic slowdown, the CBT implemented an additional cut in January. While inflationary risks persist in the near term, relatively high real rates and recent tightening in loan growth caps should keep disinflation from continuing. We expect 25.5% inflation and a 27.5% policy rate at the end of 2025 with risks skewed to the upside.
Is Yatirim: Terminal rate 30%
Following the statements made, we are not making any changes to our year-end policy rate forecast of 30%. CBRT will probably not change the interest rate reduction step at the meetings in the first half of the year. We expect the rate cut to slow down slightly in the second half of the year, either through a step reduction or a pass in one of the four meetings. Our year-end inflation forecast is 27%, equal to the market’s average expectation and 6 percentage points above the CBRT’s optimistic forecast.
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