Macro and Politics

* The Monetary Policy Committee (MPC) published an interim decision note, while introducing TL and FX liquidity measures to limit market volatility. Yesterday, we closely monitored a series of actions taken by the Central Bank of Turkey (CBT). Initially, the CBT announced the initiation of TL-settled forward FX sale auctions to curb potential volatility in exchange rates and ensure balanced foreign currency liquidity. Subsequently, the MPC decided to raise the overnight lending rate to 46%, while keeping the policy rate and the overnight borrowing rate unchanged at 42.5% and 41%, respectively. In a follow-up announcement, it has been decided to suspend the one-week repo auctions for a period of time. The daily liquidity injected into the market via these one-week repo auction is TL5bn. On the other hand, the TL liquidity surplus in the market has remained substantial, amounting to TL790bn as of yesterday. Consequently, CBT’s net funding position is negative — meaning that it has been withdrawing liquidity from the market. Hence, it is important to underline that by raising the upper band to 46%, the Bank aims to increase the interbank overnight borrowing cost. The CBT primarily sterilizes the excess TL liquidity through deposit auctions, borrowing TL from banks. Therefore, it can be expected the Bank to refer to the upper band of the corridor in its deposit auctions, with overnight rates likely rising towards this level. This can be interpreted as an effective rate hike and the decision significantly diminishes the likelihood of a rate cut in April. Moreover, in the statement accompanying the decision, the MPC emphasized that "Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen." This suggests that, if necessary, the CBT is prepared to implement interest rate hikes. Given the high pass-through effect of exchange rates in the current period, we would like to emphasize that the current volatility may partially reflect March inflation figures, but it is more likely to have a larger impact on April inflation outcomes.

* The Consumer Confidence Index ameliorated to a level of 82, up from 81 as of February, indicating the highest level since June 2023. Additionally, the 3-month moving average increased from 80.7 to 81.5, reaching its peak since July 2023. Following weak signals regarding economic activity in the January indicators, the initial data for February suggests a re-emerging recovery. We observe an increasing upside risk to our 2025 growth forecast, which stands at 2.6%. Our baseline scenario for this year had anticipated a palpable decline in annual growth in the first quarter of 2025, followed by a recovery in activity from the second quarter onwards, with overall growth for the year remaining at 2.6%. However, the leading indicators received so far suggest that the slowdown we expected in the first quarter may not materialize to the extent we had anticipated, signaling that the trajectory of growth dynamics continues to pose risks to the disinflationary process. Consequently, we are considering revising our 2025 growth forecast upwards to a range of 3.1% to 3.2% following the first quarter.

* During the week of March 7 – 14, foreign investors recorded a net purchase of USD480.1mn in the equity market, marking the strongest foreign inflow since the week of December 8th, 2023. Meanwhile, they were also net buyers in the bond market (excluding repo transactions), registering an inflow of USD1.46bn, which led to an increase in their share of the total bond stock to 8.3% from 8.1%. Moreover, during the period of March 7 – 14, the residents’ FX deposits climbed by USD608mn (excluding gold accounts and adjusted for the EUR/USD parity effect), while their total FX deposits (including gold, price adjusted) increased by USD667mn. Moreover, the CBT’s gross FX reserves rose by USD1.2bn to USD171.2bn, while net international reserves dropped by USD0.4bn to USD73.8bn. Total swap stock posted no palpable change compared to a week ago at USD8.5bn, while net reserves excluding swaps eased by USD0.3bn to USD65.3bn.