Macro and Politics

* The CBT will release the results of the February Market Participants’ Expectations Survey today @ 10:00 local time. Following the CBT’s upward revision of its year-end inflation forecasts in the 1Q25 Inflation Report presentation, the February survey results indicated a rise in market participants’ expectations for 2025. The year-end inflation expectation, which stood at 27% in the January survey, increased to 28.3% in February. However, we believe that partial retroactive reduction of the medical examination copayment increases and February inflation realizations coming in below expectations at 2.3% could limit any further upward revisions in inflation forecasts by market participants. In addition to year-end projections, today’s survey results will also be closely watched for participants’ expectations regarding March’s monthly inflation increase.

* The Treasury and Finance Ministry will release January cash budget figures @ 17:30 local time. The central government budget recorded a deficit of TL139.3bn in January, while the primary balance posted a surplus of TL23.8bn. Accordingly, the 12-month cumulative budget deficit remained at TL2.1tn, while the primary deficit narrowed to TL782.3bn. Recall that the Treasury's cash balance posted a deficit of TL204.9bn in January, while the primary balance recorded a deficit of TL54.1bn during the same period, reflecting a persistent divergence between accrual-based and cash budget outcomes. While cash-based performance is likely to remain weak, we foresee non-tax revenues and interest expenditures emerging as the key drivers of fiscal performance in the months ahead. In the absence of a forthcoming improvement in the cash budget, we believe that upside risks to growth could intensify. As 2025 is set to be the year of a decisive battle against inflation, the effective implementation of fiscal policy in greater coordination and the achievement of fiscal consolidation will be critical in striking a balance between inflation and growth. In this context, we maintain our 2025 budget deficit forecast at TRY 1.61 trillion (2.7% of GDP). However, we believe that risks to our forecast are increasingly skewed to the upside.

* The Monetary Policy Committee (MPC) continued its easing cycle by cutting the policy rate for the third time, reducing it by 250bps to 42.5%, in line with our house estimate and market consensus. The partial retroactive reduction of the medical examination copayment increases, followed by February inflation coming in below expectations at 2.3%, had recently fueled speculation in the markets about the possibility of a rate cut exceeding 25bps. However, given the still-resilient demand dynamics and our expectation that the decline in annual inflation will moderate relatively in the second half of the year, we do not anticipate rate cuts exceeding 250bps in the coming period. We expect the MPC to continue its rate cuts with a 250-bps reduction at its upcoming meeting on April 17th. Yet, given that the supportive impact of base effects will wane in the second half of the year and that leading indicators for 1Q25 suggest resilient than expected economic activity, we anticipate a slower pace of easing, starting from the June meeting. We project that rate cuts will persist throughout 2025, bringing the policy rate to 30% by year-end. Our 2025YE inflation forecast for 2025 stands at 28%.

* During the week of February 21 – 28, the bond market (excluding repo transactions) experienced a modest foreign inflow of USD53.5mn, while foreign investors emerged as net sellers in the equity market with a net outflow of USD107.7mn. On an annual basis, the equity market recorded a cumulative foreign outflow of USD2.5bn, whereas the bond market (excluding repo transactions) saw a cumulative foreign inflow of USD18bn. In ytd terms, there has been a foreign inflow of USD222.5mn and USD2.2bn to the equity and the bond market (excluding repo transactions), respectively. Moreover, following a cumulative increase of nearly USD5bn in corporates’ FX deposits over the past three weeks, this upward trend reversed during the week of February 21 – 28. Hence, during the mentioned period, the resident’s FX deposits dropped by USD1.3bn (including gold, price adjusted), saw a palpable decrease of USD1.3bn. Besides, the CBT’s gross FX reserves dropped by USD4.6bn to USD165.5bn, while net international reserves eased by USD3.6bn to USD68.3bn. Net reserves excluding swaps tumbled by USD5bn to USD60.6bn, while swap stock increased by USD1.4bn to USD7.7bn.