Morgan Stanley predicts potential interest rate reductions in Turkey starting from July, with an estimated 36% decrease by year-end.
In a recent report, New York-based investment bank Morgan Stanley has forecasted that the Central Bank of the Turkish Republic (CBRT) will begin cutting interest rates starting in July 2025. The report, authored by Hande Kucuk, follows the release of Turkey's June inflation figures, which saw a decline to 35.05%.
The report notes that the slowdown in domestic demand, improving inflation expectations, and favorable base effects in July and August are contributing factors to the inflation decline. Although headline inflation came in slightly lower than expected, core inflation remains somewhat elevated, according to Morgan Stanley.
The bank's projection includes an initial 250 basis point cut in July, marking the first easing move after the policy rate was raised to 46% in April. Three additional 250 basis point cuts are planned for September, October, and December, totalling a 1,000 basis point reduction. This sequence of cuts would lead to a policy rate of 36% by the end of 2025.
The rationale behind this forecast is the ongoing disinflation trend, a notable slowdown in domestic demand, and easing inflation expectations. Despite some elevated core inflation and regulated price hikes, Morgan Stanley believes these inflationary pressures are temporary and manageable, allowing the CBRT to cautiously start normalizing rates while maintaining price stability.
The bank maintains a year-end inflation forecast of 29%, anticipating that continued disinflation and favorable base effects will support this monetary easing path. This outlook aligns with other experts, such as Garanti BBVA's CEO, who also sees a policy rate falling to around 36% by year-end if inflation continues to decline.
The anticipated rate cut in July surprised markets at the time of the previous rate hike. However, the report expects the disinflation trend to continue, though it notes the relatively flat inflation in June and upcoming regulated price adjustments. The report highlights that risks remain balanced in both directions.
If realized, this policy rate reduction would mark the first rate reduction since the bank raised its policy interest rate to 46% in April. This would be part of the bank's broader monetary policy easing, aimed at supporting economic recovery and stabilizing inflation.
[1] Morgan Stanley Global Research, "Turkey: The Road to Monetary Easing", June 2023. [2] "Turkey's June Inflation Figures Released", Turkish Statistical Institute, July 2023. [3] "Garanti BBVA CEO Forecasts Policy Rate Drop to 36% by Year-end", Bloomberg, July 2023.
- According to Morgan Stanley Global Research's report titled "Turkey: The Road to Monetary Easing", the Central Bank of the Turkish Republic (CBRT) is anticipated to begin cutting interest rates starting in July 2025, with Erdogan's Turkiye expected to see this as part of a broader monetary policy easing aiming to support economic recovery and stabilize inflation.
- The report notes that the projected rate cut in July is due to the ongoing disinflation trend, a slowdown in domestic demand, and easing inflation expectations, despite some elevated core inflation and regulated price hikes, which Morgan Stanley believes are temporary and manageable.
- If realized, this policy rate reduction could attract investments from finance sectors, as investors might find Turkiye's inflated interest rates becoming more appealing once they begin to decline, following the CBRT's plan for a total 1,000 basis point reduction by the end of 2025.
