TRY: Rate cuts to resume today – Commerzbank

Expectations have intensified for the Turkish central bank (CBT) to resume cutting interest rates today: with analyst forecasts for a cut between 250bp and 350bp (majority expectation for 250bp). This prospect already became clear during the last rate meeting: CBT kept the rate unchanged then, but made subtle changes to its language and communication which made it clear that the central bank was gearing to cut rates soon – reference to the potential for monetary tightening was removed from the statement, and replaced with statements that the CB would utilise all tools in case the inflation outlook were to worsen later, Commerzbank's FX analyst Tatha Ghose notes.

Lira is likely to keep depreciating faster

"The rationale which CBT will repeat today in defence of rate cuts is that inflation has been moderating steadily. We, ourselves, do not find recent inflation or balance of payments developments too convincing: we dismiss apparent trends based on year-on-year price changes; seasonally-adjusted month-on-month CPI increase still annualises to nearly 30%, which is incompatible with CBT’s end-2025 inflation forecast. If one were to trust the Istanbul Chamber of Commerce (ITO) cost of living data more than the official CPI, then inflation is running even faster."

"Furthermore, several fundamental factors are currently pro-inflationary, including recent upward adjustment to wholesale natural gas tariffs by the state energy company, the higher oil price now (compared with April-May), and around 26% running rate of lira depreciation. Last but not least, there may have been some improvement in capital inflow recently, but that was a rebound from the low of March-April, and also boosted by primary issuance. Net FX reserves, excluding swaps, fell in June by a steep 9.5% to their lowest level since August 2024 – in other words, capital flows remain volatile and confidence has not yet been fully restored."

"Given these complexities, and despite the optical improvement in year-on-year inflation, we believe the credibility of the policy framework necessitates a more cautious approach than aggressive early rate cuts. The lira is likely to keep depreciating faster, particularly if CBT were to make complacent assessments about inflation and proceed with significant rate reductions over the coming quarter."