Central Bank expected to cut key interest rate this week

ISTANBUL

The Turkish Central Bank is expected to start the easing cycle this week after keeping the key policy rate steady for eight months.

Most economists surveyed by state-run Anadolu Agency forecast that the bank would slash its policy rate by 150 basis points from the current 50 percent.

The last Monetary Policy Committee (MPC) rate-setting meeting of the year will be held on Dec. 26. The next meeting of the MPC is scheduled for Jan. 23, 2025.

Ten out of 14 economists surveyed forecast a decline from the meeting, ranging between 47.5 percent and 50 percent, while four said they expected no change.

The average of economists' 2025 year-end policy rate expectations was 29.5 percent.

To tackle rampant inflation, the bank raised the rate from 8.5 percent to 50 percent from May 2023 until this March.

The anticipated rate cut will take place at a time when inflation is slowing but at a slower-than-expected pace.

In a recent report, Citi said that it expected the easing cycle to begin in December with a 250 bps cut and see the policy rate at 30 percent by the end of 2025.

While the November inflation reading turned out to be higher than expected, the outcome was largely driven by unprocessed food prices, which are likely to normalize in the coming months, it argued.

The annual inflation came in at a higher-than-expected 47.09 percent in November with consumer prices rising 2.24 percent.

Growing evidence of an economic slowdown and historically tight financial conditions faced by bank-dependent borrowers also lend support to its view that a 250 bps cut in December is still on the table, Citi said.

“We concur that a less aggressive easing cannot be entirely ruled out depending on the developments regarding residents’ FX deposits, the exchange rate and reserve accumulation,” it added.

In a report released after the inflation data was out, Morgan Stanley said it expected a measured rate cut in December.

“Barring any upside surprise in minimum wage [to above 35 percent], and risks related to FX or reserve volatility, we think the MPC will likely start gradual rate cuts on its meeting on Dec. 26,” it said.

Discussions on setting the minimum wage have been going on since Dec. 10.

The new minimum wage for 7 million workers which will take effect in 2025 is expected to be announced this week.

“We keep our forecast for a pace of 200 bps cuts starting in December, but given a third consecutive beat in headline inflation, the MPC might opt for a smaller cut [150bp] to signal a 'hawkish' cutting cycle for next year,” Morgan Stanley said.

On Dec. 19, the Fed cut interest rates by a quarter point to between 4.25 and 4.5 percent and signaled a slower pace of cuts ahead.

Earlier this month, the European Central Bank lowered rates again.

The quarter-point move was the Frankfurt-based central bank's third cut in a row and its fourth since June.