Wall Street divided over Türkiye’s first potential interest rate cut in nearly 2 years

The Central Bank of the Republic of Türkiye (CBRT) is widely expected to announce its first interest rate cut in nearly two years this Thursday (Dec.26), but analysts remain divided over the scale of the reduction, according to a recent Bloomberg report.

Analyst expectations vary widely

Policymakers, led by Central Bank Governor Fatih Karahan, are predicted to lower the benchmark one-week repo rate to 48.25% from 50%, based on a Bloomberg survey.

However, projections vary because of the absence of clear guidance from the central bank.

• JPMorgan Chase & Co. and Deutsche Bank AG anticipate a 150 basis points cut.
• Citigroup Inc. and Bank of America Corp. predict a 250 basis points reduction.

Some officials have emphasized the importance of caution to avoid market perceptions of overly aggressive monetary easing.

Market signals, investor sentiment

The central bank’s recent statements have indicated a shift towards lower borrowing costs. Governor Karahan previously noted signs of slowing demand and services inflation, which markets interpreted as a signal for upcoming rate cuts.

However, analysts remain divided on the central bank’s approach:

• Goldman Sachs Group Inc. expects the bank to hold rates steady for a ninth month, citing concerns about high inflation and loan growth.
• Bloomberg Economics predicts gradual rate cuts throughout 2025, projecting a policy rate of 25% by year-end.

“Looking ahead, we expect the central bank to lower rates at nearly all of its monthly meetings next year, cutting the policy rate to 25% by end-2025. The easing of financial conditions will also feature looser macro-prudential rules—we especially see the central bank focusing on this in the second half of the year.” Selva Bahar Baziki, an economist, said to Bloomberg.

Inflation, fiscal policy remain key factors

Türkiye‘s annual inflation rate remains a significant factor in monetary policy decisions. The central bank recently raised its inflation forecast to 44% for 2024 and 21% for 2025.

Additionally:

• Monthly inflation, adjusted for seasonality, accelerated in November.
• Inflation expectations among businesses and households remain elevated.

The government’s 30% minimum wage increase for 2025 has been seen as a stabilizing factor.