Türkiye | CBRT cut policy rate by another 250bps

The Central Bank (CBRT) lowered the policy rate by another rate cut of 250 bps to 45%, in line with market and our expectations. The bank also signaled that it may introduce new tools to sterilize the increasing excess TL liquidity in the market.

Key points

• Key points:
• The CBRT seems to adopt a less hawkish communication by changing their reference of tight monetary policy via a sustained decline in monthly inflation trend and a convergence of inflation expectations to the projected forecast range with a more general reference as price stability via a sustained decline in inflation (most probably a reference to a decline in annual CPI).
• The CBRT stated that in January, service items with high tendencies for time-dependent pricing and backward indexation to past inflation were prominent in monthly inflation while noting that it would be in line with its expectations. We expect monthly inflation around 4-4.5% in January, leading annual inflation (40.7%-41.5%) to decline further.
• Slow but ongoing de-dollarization trend among residents, combined with continued capital inflows, has pushed the Central Bank's net reserves exc. swaps to reach historical high levels. However, increasing excess TL liquidity poses downside risks to market interest rates, such as deposit rates, potentially affecting demand for TL assets. Hence, the CBRT signaled that it may utilize new tools to sterilize the excess liquidity.
• We expect annual consumer inflation to retreat faster in 1Q25 on base effects but more gradually thereafter before reaching to 26.5% at the year-end taking into account still high inflation expectations and strong inertia.
• We stay cautious at our funding rate expectation of 31% for 2025 year end after 250 bps cuts in next two meetings and smaller cuts afterwards, while also expecting the CBRT to maintain credit growth caps at least during 1H25.

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