Deutsche Bank highlighted inflation and risk factors in the interest rate cut.

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Deutsche Bank reported that the Central Bank of the Republic of Turkey (CBRT) emphasizes a data-driven approach in its future monetary policy decisions, indicating a conscious and measured easing cycle in the 2025 monetary policy outlook.

NOTE FOLLOWING THE INTEREST RATE CUT DECISION

Investment bank Deutsche Bank shared an assessment note following the CBRT's decision to cut interest rates by 250 basis points yesterday. The note reminded that the CBRT set the policy interest rate at 47.5% by reducing it by 250 basis points, stating: "The beginning of an easing cycle is indicated after maintaining the policy interest rate at 50% since March." While there is widespread expectation for a rate cut in December, the magnitude of the cut was uncertain as market forecasts varied between 150 and 250 basis points. Therefore, the 250 basis point cut is at the upper limit of expectations. However, considering that the CBRT announced it would reduce the number of Monetary Policy Committee (MPC) meetings from 12 to 8 in 2025, allowing for larger adjustments per meeting during the easing cycle, a larger cut is less surprising.

NARROWING CORRIDOR AND POLICY SIGNALS

The note recalled that the CBRT decided to set borrowing and lending rates on an overnight basis with a margin of +/- 150 basis points compared to the one-week repo auction interest rate, indicating that this narrowing corridor points to a more cautious approach regarding future interest rate decisions. It was noted that combined with the reduction in the number of MPC meetings, this signals a more hawkish trend within the policy framework.

2025 MONETARY POLICY OUTLOOK

Deutsche Bank reported that the 2025 monetary policy outlook indicates a conscious and measured easing cycle. The bank's year-end inflation forecast is maintained at 25.4%, while the policy interest rate forecast is kept at 30%.

IMPORTANCE OF DATA-DRIVEN APPROACH

The note stated that considering the CBRT's emphasis on a data-driven approach in its future policy decisions, the easing cycle may not be a simple process. The following assessment was made: The high inflation momentum at the beginning of the year, the seasonally increasing demand for foreign currency during the winter months, and the rising uncertainty regarding the inflation outlook may encourage the CBRT to be more cautious in the first quarter. Therefore, after setting the policy interest rate at 45% in January, we expect the CBRT to pause interest rate cuts in March. We anticipate that the easing cycle will continue at a pace of 250 basis points per meeting after the first quarter, and that the policy interest rate will reach 30% by the end of 2025.

INFLATION AND RISK FACTORS

The note also emphasized that the development of inflation dynamics, global risk appetite, and local investors' portfolio preferences will be crucial in terms of the timing and magnitude of future cuts.