The monetary policy committee (MPC) of Turkey’s central bank on January 23 cut its policy rate by 250bp to 45% in line with market expectations (chart).

On December 26, the authority launched the ongoing rate-cutting cycle with a 250bp cut. Prior to this initial monetary loosening, the MPC kept its policy rate unchanged at 50% for eight straight months from March.

Inflation to rise in January

While the underlying trend of inflation decreased in December, leading indicators point to an increase in January (mainly driven by services items with time-dependent pricing and backward indexation), in line with the projections, the MPC said in the statement that it released with its latest decision on rates.

Indicators for 4Q24 suggest that domestic demand stands at disinflationary levels. Inflation expectations and pricing behaviour in Turkey are tending to improve but they continue to pose risks to the disinflation process.

Moderation in domestic demand, real appreciation in the Turkish lira and improvement in the inflation expectations remain on track. Increased coordination of fiscal policy is awaited.

Macroprudential measures and sterilisation tools will remain in effect.

Monthly "dips" in December

On January 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 44.38% y/y in December versus 47.09% y/y in November and 64.77% at end-2023.

TUIK also posted monthly official inflation of 1.03% for December after releasing 2.24% for November.

Seasonally-adjusted inflation figures were also released at 1.87% for December and 2.86% for November.

In the coming months, TUIK is set to deliver further outcomes in the 1-2%s for the official monthly headline indicator.

The central bank also tracks inflation expectations via its monthly "Sectoral Inflation Expectations" and "Survey of Market Participants" releases.

42% in January

On November 8, the central bank hiked its end-2024 official inflation "target" to 44% y/y in its latest quarterly inflation report from the previously "targeted" 38% y/y.

The regulator, meanwhile, is targeting end-2025 official inflation of 21% y/y with the upper boundary set at 26% y/y.

During a press conference, central bank governor Fatih Karahan said that the regulator sees official annual inflation at 42% (the upper boundary of the previous end-2024 target) in January and at 38% (the previous target) in March.

The central bank also expected that unadjusted monthly inflation for November and December would be released at levels a little bit higher than the 1.5%-level, while the seasonally-adjusted figures would turn out to be at levels around the 2.3%s or a little bit above 2%.

The seasonally-adjusted monthly inflation figures will edge up a little in 1Q25 (due to wage hikes and new year price/fee updates), according to the governor.

It is foreseen that they will, meanwhile, fall below the 1.5%-level starting from 3Q25 and end the year in and around the 1.3%s (closer to the 1%-level).

On February 7, the central bank will release its new inflation report and updated forecasts.

Another 250bp cut on March 6

On March 6, the MPC will hold its next meeting and, as things stand, another 250bp cut seems almost certain.

The MPC will hold eight meetings in 2025. If it delivers a 250bp cut at each of the remaining seven meetings, the policy rate will during this year decline by 20pp to 27.5%.

As things stand, given that the upper boundary of the authority's forecast range for end-2025 official inflation stands at 26% y/y, the journey along the path in question can be considered as under way.

However, if the TUIK’s inflation releases overshoot the central bank’s forecast range, the MPC may remain on hold at one or two meetings.

On November 29, TUIK said that Turkey had entered a technical recession with the 3Q official GDP release.

The orange man creates volatility

Looking at the global markets, the new year rally lasted just a short while. The markets are on shaky ground with Donald Trump back at the White House.

The EUR/USD tested the 1.01s but bounced back to the 1.04s.

On December 18, the Federal Reserve (Fed) delivered another 25bp rate cut, bringing the upper limit of its federal funds target range to 4.75% from 5.50% on September 17.

Currently, the Fed governors expect the rate to decline to 4.00% in 2025.

As things stand, the market expects another 25bp cut at the next rate-setting meeting to be held on January 29.

On December 12, the European Central Bank (ECB) also delivered another 25bp rate cut. Its gradual loosening brought its deposit facility rate to 3.00% in December from 4.00% in June.

On January 30, the ECB is expected to deliver another 25bp cut at its next rate-setting meeting.

Turkey’s CDS remain below the 300-level, while the yield on the Turkish government’s 10-year eurobonds remains above the 7%-level.

The USD/TRY rate is drawing a line in the 35s as the nominal devaluation and real lira appreciation policy remain on track.