Turkish central bank resumes rate cuts and signals more to come
Lead — The Central Bank of Turkey (CBT) has resumed its rate-cutting cycle, lowering the policy rate by 100 basis points to 36%, driven by improving inflation and weak domestic demand. Per the full note, the bank’s Governor, Fatih Karahan, indicated that further cuts may follow unless there is a significant change in underlying economic conditions. The decision aligns with a backdrop of decreasing inflation trends in recent months, despite external pressures, such as high oil prices. The market should remain vigilant about shifts in demand and inflation as potential catalysts for future monetary policy adjustments.
What the desk is arguing
The desk interprets the recent rate cut by the CBT as a strategic move to bolster an economy facing weak domestic demand and promising inflation improvements. Per the full note, this move comes on the heels of more favorable inflation data for September and a softening GDP outlook for Q3.
CBT's decision to keep the interest corridor at 450 basis points suggests a cautious approach, prioritizing support to domestic consumption while managing inflationary pressures. This reflects a nuanced balancing act given the current economic landscape, particularly with Brent crude prices around USD 110, highlighting challenges that still exist despite domestic improvements.
Where it sits in our coverage
Our consensus target for the Turkish lira is set at 1.075 with a range between 1.04 and 1.12. Notable contributions include: - jpmorgan with a target of 1.10 for Mar-26 - bofa with a contrasting target of 1.04 for the same tenor.
The desk's view slightly aligns with jpmorgan but is more optimistic than bofa, which occupies the lower end of our spread, suggesting that the current momentum could potentially shift sentiment rapidly.
How other firms see it
Our coverage depicts a split view on the future trajectory of the Turkish lira post-rate cut—with aligned firms like jpmorgan advocating for a stronger lira, while bofa remains more bearish, anticipating downward pressure.
Developments in the inflation trajectory and shifts in core CPI will be crucial indicators in assessing the lira's strength. Moreover, watch for potential spillover effects in other currency pairs, particularly USD/TRY as global risk sentiment evolves.
What the calendar says
No high-impact economic events are currently scheduled in Turkey over the next 30 days that could serve as immediate catalysts for market movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01CBT cuts rates by 100bps to 36%, signaling ongoing support for the economy.
- 02Improving inflation trends have prompted the central bank's more proactive stance.
- 03The potential for further rate cuts exists unless external factors shift significantly.
- 04Market sentiment will be influenced by shifts in domestic demand and inflation dynamics.
Market implications
Traders should monitor the lira, especially around the 1.075 level for breaks that could indicate shifts in market sentiment. Given the central bank’s current stance, further developments in inflation will remain a focal point.
Risks to this view
A reversal in this outlook could occur if inflation begins to accelerate unexpectedly, forcing the CBT to reconsider its dovish stance. Additionally, geopolitical tensions or a surge in oil prices could adversely impact economic conditions, necessitating a reevaluation of rate policy.
Older quick take Quick take Published 13:30 Turkey Turkish central bank resumes rate cuts and signals more to come The Turkish central bank has cut the policy rate by 100bp to 36%, as expected, amid improving inflation and continued weakness in domestic demand. The bank also indicated that additional rate cuts are likely unless there is a material shift in the conditions underpinning the current rate-cutting cycle Fatih Karahan, Governor of the Central Bank of Turkey The Central Bank of Turkey (CBT) has resumed cuts to the policy rate (1-week repo rate) after a nine-month pause, lowering it by 100bp to 36%, while keeping the width of the interest corridor unchanged at 450bp. The move, which was widely expected, reflects the central bank's assessment of softer economic activity and favourable September inflation data, despite Brent crude oil trading close to US$110 per barrel and lingering geopolitical risks in the Middle East.
In its statement, the CBT said it would continue to monitor the growth and inflation outlook. On inflation, the bank has turned somewhat more confident amid the recently announced inflation figures and leading indicators, which confirm improvement in the underlying inflation trend. Last month, lower-than-expected CPI driven by food, particularly a sharp correction in unprocessed food, contributed to a further decline in annual inflation despite still high energy prices and unanchored inflation expectations.
The underlying trend also improved not only in core goods despite the lira’s monthly depreciation accelerating since the start of the war, but also in services, which have been on a steady downward trend since March. Regarding GDP growth, recent data suggest the economy is following a more moderate growth path in the second half of the year, while the disruption in investment funds is expected to weigh further on domestic demand. As a result, the CBT concluded that domestic demand is weak, providing additional justification for this month's rate cut.
When it comes to forward guidance, the central bank had previously emphasised that monetary policy decisions would be taken with a cautious, meeting-by-meeting approach focused on the inflation outlook. In this month's forward guidance, however, it altered its wording and shifted the emphasis to the magnitude and timing of future policy steps. This change implies that, unless there is a material shift in the conditions that have prompted the easing cycle, the bank is likely to continue its rate-cutting process in December as well.
On the other hand, it kept its messaging around the macroprudential framework and liquidity management unchanged, signalling that a cautious approach in these areas will continue. Overall, the CBT reiterated its narrative of improving underlying monthly inflation momentum, as higher rates and slower loan growth have weakened domestic demand, containing the indirect effects on inflation. Against this backdrop, we expect the policy rate to reach 35% by year-end, implying a further 100bp cut in December.
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