The monetary policy committee (MPC) of Turkey’s central bank on November 21 kept its policy rate unchanged at 50% for an eighth straight month in line with market expectations (chart).

The country's underlying trend of inflation registered a decline in October, the authority noted in a press release, adding that signs indicating an improvement in services inflation have become more apparent.

Inflation expectations and pricing behaviour were tending to improve but still posed risks to the disinflation process, the MPC also said.

December back on cards

The next MPC meeting is scheduled for December 26. The possibility that the rate-setters will again stick with the 50% benchmark is higher than the chance of a 250bp cut, but the latter outcome should certainly not be disregarded.

Key markets around the world will still be on their Christmas break come December 26. Dealing with  immediate impacts of a rate cut would therefore be  easier for Turkey's economic officials.

The most likely scenario is still that the easing cycle will begin in 1Q25, rather than the previously frequently anticipated 4Q24.

On November 29, TUIK will release its official GDP data for 3Q24. Figures that declare a technical recession has taken hold are in prospect.

49% in October

On November 4, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 48.6% y/y in October versus 49.4% y/y in September (chart).

TUIK’s inflation series has quickly fallen back to the 40%s thanks to the base effect after peaking at 75.45% in May.

TUIK also posted unadjusted monthly official inflation of 2.88% for October after releasing 2.97% for September.

The seasonally-adjusted monthly inflation for October was released at 2.51% while the September figure was revised down to 2.73% from the 2.80% that was released a month previously.

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.

About 46% in November

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

The upper boundary of the forecast range was also moved up to 46% y/y from 42% 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 expects that unadjusted monthly inflation for November and December will be released at a point a little bit above the 1.5%-level while the seasonally-adjusted figures will come out at levels around the 2.3%s or a little bit above 2%.

A 1.6% m/m inflation release for November will mean a 46% annual inflation figure, providing the space for bringing the policy rate to 47.5%.

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).

November stress still felt

Looking at the global markets, the stress due to seasonal fluctuations prior to the beginning of the new year rally along with the tensions generated by the US presidential elections are still in play.

With the beginning of the new year rally, an easing atmosphere will be more strongly felt.

On November 7, the Federal Reserve (Fed) delivered another 25bp rate cut. Since September, it has delivered two rate cuts, bringing the upper limit of its federal funds target range to 4.75% from 5.50%. Its next rate-setting meeting will be held on January 29.

The European Central Bank (ECB) has, meanwhile, delivered three rate cuts. They brought its deposit facility rate to 3.25% in October from 4.00% in June. On December 12, the regulator will hold its next rates 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.

Carry traders "close lira positions"

Since end-August, the Erdogan regime has turned to its straight-line policy in the USD/TRY rate. The pair is currently drawing a line around the 34-level.

On November 19, Bloomberg reported that some carry traders had closed their lira positions after the USD/TRY pair saw the 34.60s.

Despite the limited stress, the regime's smooth nominal devaluation and real lira appreciation policy remain on track.

Carry Trade Flows to Turkey (estimate)
million USD	Turkish Banks Off-Balance Sheet FX Position	Turkish Central Bank's Total Swap Stock with Local Banks	Swaps Converted to Deposits	Lira-settled FX Frowards	Turkish Central Bank's Net FX Derivatives Stock with Local Banks	Turkish Banks' Swap Stock with Foreign Counterparts (estimate)	Carry Trade Flows (estimate)	Cumulative Flow
Mar 29, 2024	55,781	57,898	433	4,279	61,744	-5,963
Apr 26, 2024	43,446	39,586	363	3,384	42,607	839	6,803	6,803
May 31, 2024	35,224	20,811	243	592	21,160	14,064	13,224	20,027
Jun 28, 2024	21,134	4,719	0	0	4,719	16,415	2,352	22,378
Jul 26, 2024	18,656	55	0	0	55	18,601	2,186	24,564
Aug 29, 2024	17,337	0	0	0	0	17,337	-1,264	23,300
Sep 27, 2024	22,566	-1,095	0	0	-1,095	23,661	6,324	29,624
Oct 25, 2024	21,134	-4,570	0	0	-4,570	25,704	2,043	31,667
Nov 1, 2024	18,018	-6,913	0	0	-6,913	24,931	-773	30,894
Nov 8, 2024	18,199	-6,808	0	0	-6,808	25,007	76	30,970
Nov 15, 2024	16,683	-7,375	0	0	-7,375	24,058	-949	30,021
Nov 20, 2024		-6,378	0	0

Table: Between October 25 and November 15, it is estimated that Turkey experienced around $1.6bn in carry trade outflows.
 

Weekly net flows, Turkey's lira papers
million USD	Government papers	Cumulative since end-March	Stocks		Total cumulative
April	843	843	225	225	1,068
May	6,597	7,440	-394	-169	7,271
June	688	8,128	-1,368	-1,537	6,591
July	2,974	11,102	94	-1,443	9,659
Aug	916	12,018	-744	-2,187	9,831
Sep	1,922	13,940	-69	-2,256	11,684
Oct	234	14,174	-708	-2,964	11,210
Nov 1, 2024	622	14,796	111	-2,853	11,943
Nov 8, 2024	150	14,946	-164	-3,017	11,929
Nov 15, 2024	1,627	16,573	139	-2,878	13,695

Table: Net inflows to domestic lira papers do not suggest sharp outflows.
 

Turkish central bank's net FX position
	A.1_FOREIGN ASSETS (Thousand TRY)	P.1_TOTAL FOREIGN LIABILITIES (Thousand TRY)	Net (A.1-P.1)	USD/TRY Buying	Net USDmn	2. Aggregate short and long positions in forwards and futures in foreign currencies	3. Other (specify)	Net (minus) swaps	Cumulative change (USD bn)
Mar 29, 2024	4,057,007,074	3,834,312,295	222,694,779	32.26	6,903	-76,653	-4,338	-74,088
May 30, 2024	4,675,489,675	3,476,230,575	1,199,259,100	32.25	37,188	-39,291	-4,680	-6,783	67
Jun 28, 2024	4,762,091,401	3,700,003,784	1,062,087,617	32.83	32,355	-24,565	-3,264	4,526	79
Jul 31, 2024	4,967,794,204	3,565,009,078	1,402,785,126	33.08	42,401	-23,112	0	19,289	93
Aug 29, 2024	5,142,259,219	3,967,022,626	1,175,236,593	33.92	34,644	-22,339	0	12,305	86
Sep 30, 2024	5,276,985,424	3,690,124,446	1,586,860,978	34.12	46,507	-21,247	0	25,260	99
Oct 31, 2024	5,563,833,663	3,731,622,343	1,832,211,320	34.18	53,607	-16,649	0	36,958	111
Nov 15, 2024	5,445,510,144	3,735,736,678	1,709,773,466	34.33	49,799	-15,509	554	34,844	109
Nov 20, 2024	5,352,666,195	3,761,122,115	1,591,544,080	34.44	46,216

Table: The central bank may have burnt through about $7bn since end-October to defend the lira.

Between end-March and November 15, the central bank’s net FX position improved by $109bn while the local banking system’s FX loans rose by $29bn and FX deposits declined by $18bn in addition to the $30bn of carry trade inflows and $14bn of inflows to equities and domestic government papers.
 

FX loans and deposits at Turkish banks
USDmn	FX loans	Change	Cumulative change	FX deposits	Change	Cumulative
Mar 29, 2024	134,675			210,403
Apr 26, 2024	140,714	6,039	6,039	205,381	-5,022	-5,022
May 31, 2024	150,233	9,519	15,558	192,793	-12,588	-17,610
Jun 28, 2024	151,399	1,166	16,724	188,742	-4,051	-21,661
Jul 26, 2024	155,315	3,916	20,640	190,908	2,166	-19,495
Aug 29, 2024	160,509	5,194	25,834	198,245	7,337	-12,158
Sep 27, 2024	163,592	3,083	28,917	197,871	-374	-12,532
Oct 25, 2024	163,226	-366	28,550	194,099	-3,772	-16,304
Nov 1, 2024	163,823	597	29,148	193,869	-230	-16,534
Nov 8, 2024	164,319	496	29,644	192,307	-1,562	-18,096
Nov 15, 2024	163,360	-959	28,685	191,966	-341	-18,437
Nov 18, 2024	163,483	123	28,808	192,154	188	-18,249

Table: FX loans and deposits at Turkish banks.