Turkey’s central bank is set to implement its first interest rate cut in nearly two years this Thursday, with major financial institutions divided on how much the rate will be reduced.
According to a Bloomberg survey, analysts predict the benchmark one-week repo rate will be lowered from 50% to 48.25%. However, predictions vary due to the lack of clear guidance from the central bank. JPMorgan Chase and Deutsche Bank anticipate a 150-basis-point reduction, while Citigroup and Bank of America expect a larger cut of 250 basis points. There are concerns that an overly aggressive cut could send the wrong signal to investors, as the central bank looks to unwind its most aggressive tightening policy in years.
Bloomberg Economics suggests that the central bank will continue cutting rates at nearly every meeting next year, projecting the policy rate to fall to 25% by the end of 2025. This easing of financial conditions will likely be accompanied by looser macroprudential rules, particularly in the latter half of the year.
However, some investors believe the central bank may take a more cautious approach. Economists from Goldman Sachs warned that high inflation and strong loan growth make an immediate rate cut seem premature, with a rate reduction possibly occurring later. Governor Fatih Karahan has fueled speculation of lower rates by stating that demand and services inflation are easing, a view supported by the central bank’s most recent policy statement.
The shift toward rate cuts has led to a slight increase in market inflation expectations. Despite this, the central bank is striving to reassure markets, stressing that lower rates will not necessarily lead to looser policy. Deputy Governor Cevdet Akcay emphasized that the central bank’s stance will remain tight, and any easing will not be a continuous trend.
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Analysts suggest that if a rate cut occurs, it could be accompanied by other measures, such as narrowing the rates corridor. This would signal a more hawkish stance, as a narrower corridor, currently at a 600 basis-point gap between borrowing and lending rates, provides greater predictability for future rate movements.
The central bank has also called for stronger fiscal support in controlling inflation, which the government has responded to by raising the minimum wage by 30% in 2025. This wage increase is expected to help moderate demand, allowing the central bank to implement a steady rate-cutting cycle. A large portion of the workforce earns the minimum wage, and a similar wage hike in 2023 contributed to an uptick in inflation, making it challenging for the central bank to keep price pressures in check.
In its latest inflation forecast, the central bank raised its annual price growth estimate to 44% by the end of 2024 and 21% by the end of 2025. Consumer prices rose by 47.1% in November, far above the official target of 5%. The central bank will release the December inflation data on January 3. Officials are focusing on seasonally-adjusted monthly inflation figures, which accelerated in November.