Turkish stocks recover to March highs after upbeat inflation data raises anticipation of interest rate reduction
The Turkish Central Bank is widely expected to cut its key interest rate by around 300 basis points at its September meeting, continuing the monetary easing cycle following recent inflation data showing a disinflation trend.
The current interest rate stands at 43%, a result of a 300 basis points cut in July 2025. If the expected reduction materialises, the policy rate could reach around 35% by the end of the year.
The rationale behind this move is the easing inflation, a slowing economy, and bolstered foreign exchange reserves. The annual inflation rate has dropped to 33.52%, its lowest level since November 2021. Consumer prices rose by 2.06% in July, a significant decrease from the previous month.
Goldman Sachs, in a recent research note, suggests that the Turkish central bank's resumption of rate cuts could ease margin pressure on banks and act as a catalyst for recovery. The investment bank predicts that the rate cut could have a significant impact on the banking sector and the overall economy, potentially leading to a gradual rebound in sector profitability from the third quarter of 2025.
The expectations for a policy rate cut have gained momentum, with the BIST 100 index climbing to 10,926 on Monday, reaching its highest level in four and a half months. The most actively traded stocks were Turkish Airlines, Akbank, Yapi Kredi Bank, Is Bank (C), and Koc Holding. All major sectoral indices closed higher, with the technology index, financials index, services index, industrials index, and liquid banking index recording gains of 1.75%, 1.08%, 1.12%, 0.81%, and 1.8% respectively.
However, some caution remains due to risks from continued Turkish lira depreciation, which could push inflation higher than expected. Analysts foresee further cuts given the easing inflation, slower economic growth, and bolstered foreign exchange reserves. However, the ongoing currency depreciation could pose a potential threat to the projected rate cuts.
In summary, a 300 basis point cut in the key interest rate is expected in September, with the potential year-end rate standing at around 35%. The rationale for this move is the easing inflation, slowing economy, and stronger foreign exchange reserves. However, ongoing currency depreciation could pose a risk to the projected rate cuts.
- The Turkish Central Bank, under President Erdogan, is anticipating a 300 basis point reduction in the key interest rate, bringing it down to around 35%, following the September meeting, due to the disinflation trend and the slowing economy.
- If this expected reduction materializes, it could alleviate margin pressure on banks and act as a catalyst for recovery, potentially leading to a rebound in sector profitability, according to Goldman Sachs.
- In contrast, the ongoing Turkish lira depreciation could push inflation higher than expected and serve as a potential threat to the projected rate cuts, posing risks to the economy.
- The lifestyle and technology sectors, represented by stocks like Turkish Airlines, Akbank, Yapi Kredi Bank, Is Bank (C), and Koc Holding, have shown signs of recovery, with all major sectoral indices closing higher, due largely to the expectation of lower interest rates and the associated economic improvements.
