Türkiye | No surprises: The easing cycle continues

Summary

The Central Bank (CBRT) lowered the policy rate by 250bps to 42.5% as expected. Following the positive surprise of Feb CPI, the CBRT remains comfortable despite stronger domestic demand than expected. We expect 250bps cut in April and the pace of rate cuts to decelerate June onwards, reaching 31.5% policy rate by end 2025.

Key points

• Key points:
• The CBRT justified the rate cut by emphasizing the improvement in the underlying inflation trend and domestic demand staying supportive of disinflation despite its stronger level than their expectations as well.
• The recent easing in financial conditions and the acceleration in credit growth beyond the monthly credit growth caps appear to have supported demand. Besides, fiscal policy stays expansionary with cash spending similar to last year in 1H25, signaling lack of fiscal support to disinflation until 2H25.
• According to our calculations, despite high uncertainty, the output gap likely gets closer to in neutral levels in 1Q25. Therefore, the CBRT squeezed FC lending further most recently by also narrowing the scope of its exceptions. We believe the CBRT might revise credit caps and exceptions further in order to reinforce the monetary transmission mechanism.
• Given upside risks on inflation outlook, the CBRT might be required to rely on a similarly strong real appreciation of last year in the near term. Under the assumptions of real appreciation, gradual easing pattern with supported macro-prudential policies, 1-1.5pp of GDP non-primary fiscal savings, energy price hikes aligned with the inflation target and no new minimum wage hike in 2H25, we expect consumer inflation to decline to %29 at the end of the year.
• The CBRT emphasized that the policy rate decisions (not only decisions) will focus on the inflation outlook and be made on a meeting by meeting basis, implying that other macro-prudential measures may be added at any time if needed. We expect the pace of rate cuts to come down June onwards and forecast 31.5% policy rate by year end.

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