Macro and Politics

* The Treasury will hold 4y TLREF-indexed bond auction today. According to three-month (Fed – Apr 25) domestic borrowing strategy, the Treasury has a total domestic redemption of TL117.8bn in February, while in return plans to borrow TL180.1bn throughout the month, via five auctions and one direct sale. The Treasury’s tapped the domestic markets to the tune of TL131.8bn so far this month. After today’s single auctions, the Treasury will hold 3y CPI-indexed & 5y fixed coupon bond auctions tomorrow and finalize its domestic borrowing program for February.

* The Treasury and Finance Ministry will release January central government budget figures @ 11:00 local time. The Treasury’s cash budget recorded a deficit of TL204.9bn in January, while the primary balance registered a deficit of TL54.1bn during the same period. January cash budget figures are indicative for today’s central government figures. In December, the central government budget recorded a deficit of TL829.2bn, with the primary deficit amounting to TL754bn. As a result, the central government budget for 2024 posted a record deficit of TL2.1tn, slightly exceeding our house estimate of TL1.9tn, while aligning with the official budget deficit projection of TL2.15tn set out in the Medium-Term Economic Program. We project the 2025 budget deficit at TL1.61tn (2.7% of GDP). In 2025, a year likely to present greater challenges in addressing inflation, we believe the effectiveness of fiscal policy will depend on enhanced coordination and the successful execution of fiscal consolidation, crucial for balancing inflation and growth.

* The CBT has unveiled the results of the February Market Participants' Expectations Survey. Following the upward revision of the year-end inflation forecast presented during last week’s Q1 Inflation Report, the 2025 year-end inflation expectation, which stood at 27% in the January survey, has increased to 28.3% in February survey results. Meanwhile, participants' monthly inflation expectation for February came in at 3.23%. We anticipate that February inflation may surpass market expectations and fall within the 3.5%–4% range. Given the upward risks to our 2025 year-end CPI forecast of 28%, we are contemplating a potential revision of our expectations in the coming period. Besides, market participants expect 250bps rate cuts at both the MPC meetings scheduled for March 6th and April 17th. We expect that the CBT will proceed with a 250bps rate cut in March. However, it is crucial to highlight that the February inflation data will be pivotal here. Although we project the year-end policy rate at 30, we recognize the presence of upward risks to our estimate.

* The CBT has declared that, as part of the strategy to phase out FX-protected deposit accounts (KKM accounts), the opening and renewal of KKM accounts for legal entities have been discontinued. The Bank has announced that, effective February 15, 2025, legal entities will no longer be able to open or renew KKM accounts, including YUVAM accounts. Furthermore, according to the announcement, KKM accounts held by legal entities will no longer be included in the targets for KKM accounts’ renewal and transition to TL. Considering that legal entities account for approximately 20% of the total KKM stock, we estimate that around USD 6.5bn in KKM deposits will mature and be closed without renewal. Given the prevailing high-yield environment and positive real interest rates, we do not expect the unwinding of KKM deposits to induce a disruptive surge in FX demand. Our year-end 2025 projections suggest that the real appreciation of the TL will persist, albeit at a slower pace compared to 2024.

* House sales declined to 112,173 units in January, indicating the lowest level since June 2024. This represents a sharp 47.2% monthly contraction, yet a 39.7% y/y increase. Please recall that housing sales had surged to a three-year high of 212,637 units in December 2024. Notably, in January, mortgage-backed home sales fell by 28.1% m/m to 16,726 units in January, while continuing to post a substantial rise on an annual basis with 182.8% increase. Notably, mortgage-backed sales have exhibited significant y/y growth since September. A closer look at mortgage rates in the housing market reveals that the average mortgage lending rate stood at 42% in 4Q23 and posted no palpable change at 41.3% in 4Q24. As of January 2025, moreover, mortgage rates have remained above 40%. Despite persistently high mortgage rates, the sharp annual increase in mortgage-backed home sales appears to be driven by expectations that housing prices, which have been declining in real terms for some time, will rise in the coming period.