The monetary policy committee (MPC) of Turkey’s central bank on December 26 cut its policy rate by 250bp to 47.5% (chart).

The market was aware that a rate cut was on the cards. Expectations varied between no rate cut to a 250bp cut. The median expectation was for a 150bp cut.

Prior to the rate-setting meeting, the MPC kept its policy rate unchanged at 50% for eight straight months from March.

In tandem with the rate cut decision, the MPC also narrowed its interest rate corridor. Currently, the central bank’s overnight borrowing and lending rates stand at 150bp below and above the policy rate, namely the one-week repo auction rate. The rates were previously 300bp below and above.

Underlying trend to decline in December

The underlying trend of inflation was essentially flat in November and leading indicators point to a decline in the underlying trend in December, the MPC said in its statement accompanying the rates decision.

Indicators for the last quarter suggest that domestic demand, standing at disinflationary levels, has continued to slow, according to the authority.

While core goods inflation remained low, the improvement in services inflation became more apparent, the MPC also observed.

Unprocessed food inflation appeared to have moderated in December after an elevated course in the previous two months.

Inflation expectations and pricing behavior tend to improve but they continue to pose risks to the disinflation process.

The decisiveness on the tight monetary stance was bringing down the underlying trend of monthly inflation and strengthening the disinflation process through moderation in domestic demand, real appreciation in the Turkish lira and improvement in inflation expectations, the regulator said.

Going forward, increased coordination of fiscal policy will also contribute significantly to this process, the MPC noted.

In the coming period, the authority will set its policy rate while taking both realised and expected inflation into account.

47% y/y in November

On December 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 47.1% y/y in November versus 48.6% y/y in October.

TUIK also posted monthly official inflation of 2.24% for November after releasing 2.88% for October.

Seasonally-adjusted inflation figures were released at 2.93% for November and 2.53% for October.

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.

Around 45% at end-2024

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 upper boundary of the forecast range was moved up to 46% y/y from 42% y/y.

The central bank also targets an end-2025 official inflation of 21% y/y with the upper boundary standing at 26% y/y.

During a press conference, central bank governor Fatih Karahan said that the regulator saw 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 come out at levels around the 2.3%s or a little bit above 2%.

As TUIK released 2.24% monthly inflation for November, the central bank has to notch another miss on the board.

A 1.6% m/m inflation release for November would have meant a 46% annual inflation figure. However, a November figure of 47.1% still provided the space for a rate cut of up to 2.5%.

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 January 3, TUIK will release official inflation for December. A 2% m/m release would mean 45.8% as official annual inflation at end-2024.

Eight meetings, 20pp of cuts in 2025?

The MPC will hold eight meetings in 2025, the central bank said on December 25 in its Monetary Policy for 2025 release.

If it delivers a 250bp cut at each meeting, its policy rate will 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 path in question could 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.

Santa rally arrives late

Looking at the global markets, the new year rally arrived late this year, kicking in only at the beginning of the Christmas week. The easing atmosphere will be more strongly felt until the rally ends with a shake-up through February.

On December 18, the Federal Reserve (Fed) delivered another 25bp rate cut. It brought the upper limit of its federal funds target range to 4.75%. It stood at 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. So far, it has brought its deposit facility rate to 3.00% in December from 4.00% in June.

On January 30, the authority 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 has moved above the 7%-level.

Lately, the Erdogan regime delivered a limited currency depreciation. Currently, the USD/TRY rate is drawing a line in the 35s.

The administration's smooth nominal devaluation and real lira appreciation policy remain on track.