Macro and Politics

* CBT Governor Karahan reaffirmed his commitment to decisive policy action. Speaking at the German-Turkish Chamber of Commerce and Industry meeting yesterday, CBT Governor Karahan highlighted that recent market developments have led to depreciation in financial assets and emphasized that the observed volatility is temporary. He noted that swift policy measures have been implemented to minimize its short-term impact on the economy. He underscored that there has been no deterioration in the economy’s underlying fundamentals and reiterated the CBT’s commitment to utilizing all policy instruments within the framework of market principles with unwavering determination. Karahan also pointed to rising upside risks to April inflation, citing the impact of Ramadan on food prices and the spillover effects of recent financial market dynamics on overall price levels. Moreover, he noted that backward indexation tendencies in services inflation—particularly in components such as education and rent—continue to exert upward pressure. Given the market volatility observed since last week, we assess that the probability of a rate cut at the April 17 MPC meeting has largely diminished. However, should the recent fluctuations in the TL assets intensify further, we believe additional tightening could be introduced through the upper band of the interest rate corridor.

* February Employment figures will be released @ 10:00 local time. The adjusted unemployment rate dropped merely to 8.4% from 8.5% in January, yet the broad-based unemployment calculations remained higher. The rate of composite measure of labor underutilization – including time related underemployment, potential labor force and unemployment— rose slightly to 28.1% from 28%, remaining near its highest levels in the past 4 years. The combined rate of time-related underemployment and unemployment climbed to 18.8% from 18.4% while the combined rate of unemployment and potential labor force edged down to 18.9% from 19.3%.  We expect growth dynamics to gain some momentum starting in the second half of 2025 after a stagnant period, although we forecast GDP growth for 2025 to be lower than in 2024, at 2.6%. As a result, we expect the high levels of composite measure of labor underutilization to sustain its rising tendency.

*TURKSTAT will release February foreign trade figures 10:00 local time. Preliminary data released by the Ministry of Trade indicates an increase in the foreign trade deficit in February. According to the preliminary figures for February, exports increased by 1.5% y/y, reaching USD20.8.bn, while imports rose by 3.8%, reaching USD28.9bn. Based on these preliminary data, the foreign trade deficit climbed from USD7.5bn to USD8.2bn in February, while the annual deficit climbed from USD83.4bn to USD84.8bn. We estimate that the current account balance will record a deficit of approximately USD4.8bn in February. We would like to reiterate that we have recently revised our 2025 year-end current account deficit forecast from USD 15bn (1% of GDP) to USD 22bn (1.5% of GDP).

* The CBT will release weekly foreign portfolio flows, money & banking statistics, and international reserves for the period of March 14 – 21 @ 14:30 local time. Based on our calculations upon the CBT’s analytical balance sheet, we estimate that during the week of March 14 – 21, the net international reserves slumped by USD12bn to USD61.8bn and the gross FX reserves slid by USD8bn to USD163.2bn. We anticipate that today’s official reserve data will likely reflect a similar trend in line with our calculations. To recall the data from the previous week: 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.

* According to the results of the March Sectoral Inflation Expectations survey, 12-month ahead inflation expectations continued to decline among market participants and the real economy, while household expectations increased for the second consecutive month, albeit modestly. Hence, as per the March survey results, 12-month-ahead annual inflation expectations, compared to the previous month, decreased by 0.7 points to 24.6% for market participants, by 0.8 points to 41.1% for real sector, while increased by 0.1 points to 59.3% for households. As the March survey does not reflect the turbulence in domestic markets experienced since last week, we expect to observe the impact of volatility on the inflation expectations of economic units in the upcoming April survey results. We anticipate that inflation expectations among market participants, the real sector, and households are likely to rise in next month’s survey.