The monetary policy committee (MPC) of Turkey’s central bank on March 6 cut its policy rate by 250bp to 42.5% in line with market expectations (chart).

On December 26, the MPC launched its monetary easing cycle with a 250bp rate cut. On January 23, it delivered another 250bp rate cut.

Authority wants increased coordination of fiscal policy

Leading indicators suggest that domestic demand remains disinflationary in 1Q25, the MPC said in the statement it released with its latest decision on rates.

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

The policy rate will be determined in a way that ensures the tightness required by the projected disinflation path, taking into account the realised and expected inflation as well as the underlying trend. The MPC will adjust the policy rate prudently on a meeting-by-meeting basis, it said.

Considering recent developments in credit growth, the central bank on March 1 cut the monthly FX loans growth limit for local banks to 0.5% from the previous 1%.

Macroprudential measures and sterilisation tools will remain in effect.

Separately, media reports recently suggested that the central bank has cut the exporters’ obligation to sell their revenues to the authority to 25% of their FX income from the previous 30%.

Monthly inflation dips again

On March 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 39% y/y in February versus 42% in January and 44% y/y at end-2024.

It is not advisable to plan, price or draw inferences based on TUIK data. There is widespread concern about the reliability of Turkey’s official data series.

TUIK also posted a monthly official inflation figure of 2.3% for February. The rate dipped to 1% in December. Then it was released at 5% for January in line with expectations over new year price and tax updates.

On March 4, TUIK also said that seasonally-adjusted monthly inflation fell to 2.33% in February. The January figure was revised to 3.49% from a previously released 3.38%.

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.

38% in March

On February 7, Turkey’s central bank surprised observers by hiking its end-2025 official inflation "target" to 24% y/y in its latest quarterly inflation report from 21% y/y in the previous report released in November.

Also, the upper boundary of the end-of-year forecast range was moved up to 29% y/y from 26% y/y.

By unexpectedly updating their end-year "target", the officials aimed to give the message that monetary policy is not moving on "autopilot" and that they are at the wheel.

In the MPC’s latest statement, it was also reiterated that the policy rate will be adjusted on a meeting-by-meeting basis.

During the previous press conference held in November, the governor said that the regulator saw official annual inflation at 38% y/y in March.

The seasonally-adjusted monthly inflation figures would edge up a little in 1Q25 (due to wage hikes and new year price/fee updates) compared to the 2%s in 4Q24.

They would, 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 May 22, the central bank will release its next inflation report and updated forecasts.

Another 250bp cut almost certain on April 17

On April 17, 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 six meetings, the policy rate would fall to 27.5% from the current 45%.

Given that the upper boundary of the authority's forecast range for end-2025 official inflation has been moved up to 29% y/y, it is almost certain that the MPC will remain on hold at at least two meetings.

Output gap negative, growth strong

On February 28, TUIK released a "strong" 1.7% q/q growth figure for 4Q24. As a result, Turkey exited its technical recession.

The output gap turned negative (official GDP growth releases fell below potential growth, which can be simplified as long-term average growth) in 3Q24 and will remain there, central bank governor Mehmet Karahan said on February 7, when the authority released its latest quarterly inflation report.

In the latest statement, the MPC also reiterated that domestic demand remains disinflationary in 1Q25.

On May 30, TUIK will release its 1Q25 data.

No time to relax with the Orange Man at the helm

The USD/TRY rate is still testing the 36.50-level, with the nominal devaluation and real lira appreciation policy remaining on track.

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

Looking at the global markets, the stress is back as the Orange Man at the White House is again making noise about trade tariffs. The EUR/USD pair has jumped to the 1.08s.

As things stand, the market expects that the Federal Reserve (Fed) will again remain on hold at its next rate-setting meeting, scheduled for March 19.

On March 6, the European Central Bank (ECB) will hold its next rate-setting meeting. Another 25bp cut is on the table.