Morgan Stanley predicts delayed recovery for Turkish banks, dollar to hit TL 45 by 2025

Morgan Stanley has issued a report forecasting a delay in the margin recovery for Turkish banks, citing macroeconomic pressures and tighter regulations.

The analysis comes as the investment bank expects the Central Bank of the Republic of Türkiye (CBRT) to focus on reducing inflation through stricter measures, affecting the banking sector’s performance in the near term.

Anticipated interest rate cuts in 2025

Morgan Stanley’s report, led by economists Hande Kucuk and Nida Iqbal Ahmed, predicts that the CBRT will begin a series of interest rate cuts starting in January 2025. The report outlines a 250 basis point reduction in policy rates by March, with further cuts throughout the year, bringing the rate down to 35% by mid-2025.

Economists also anticipate that the central bank’s actions to curb inflation will support the Turkish lira, projecting a USD/TRY exchange rate of 45 by the end of 2025.

Bank margins impacted by higher funding costs

Despite expectations for a more favorable macroeconomic environment in the future, Morgan Stanley warns that Turkish banks will continue to face challenges in the short term.

High funding costs and credit growth limitations are expected to weigh on profitability through 2025. The report noted that improvements in bank margins have been pushed forward, with net income projections for 2025-2026 revised down by approximately 19%.

Inflation and currency outlook for Türkiye

Besides its analysis of the banking sector, Morgan Stanley expects inflation to remain a key risk.

The bank forecasts Türkiye’s inflation rate at 43.5% for 2024 while emphasizing that strong domestic demand and geopolitical tensions could pose challenges to achieving targeted inflation reductions.

Despite these risks, the report expresses cautious optimism for a gradual improvement in real interest rates, with inflation-adjusted rates expected to stabilize at around 3% by the end of 2025.