The Turkish inflation slows, paving the way for a December rate cut

Turkey’s headline inflation remains on a downward trajectory. In November, the annual CPI rate fell from 48.6 to 47.1 percent, marking its lowest level since mid-2023. The policymakers closely watched the monthly price increase, which eased from 2.9 to 2.2 percent. Today’s readings came in above market expectations. They are yet unlikely to prevent the first rate cut since 2023 when the Central Bank of Turkey meets on December 26.

At the same time, Turkey entered a technical recession in the third quarter due to tighter financial conditions, which continue to cool down domestic demand. The economic activity is expected to remain subdued. The 2024 GDP growth is set to decelerate below 3 percent and remain at a similar level next year.

Easing price pressures, declining inflation expectations and the normalization of consumer spending pave the way for the onset of a gradual easing cycle. The Central Bank of Turkey has already signaled the potential start of withdrawing from the extra tightening, which brought the main interest rate to 50 percent in March. Today’s data confirm a December rate cut as the baseline scenario. The initial reduction in borrowing costs will likely amount to 250 basis points.

Next year, as the annual CPI rate is likely to ease to below 25 percent year-on-year, the benchmark rate will likely be cut by around 30 percentage points. The pace of monetary easing will be determined by the path of the disinflation, which might turn out to be choppy and uneven. That said, policymakers are likely to aim to maintain real interest rates in positive territory. Despite that, Conotoxia continues to expect the Turkish currency to follow its steady depreciation path, albeit at a much slower pace than recently. Since the beginning of 2024, the lira has depreciated by 15 percent against the US dollar. Today, the USD/TRY pair touched the 34.75 mark for the first time in history. We see the exchange rate reaching 42.0 in 2025.