Macro and Politics

* The CBT has changed the reserve requirement ratios (RRR) for short-term Turkish lira-denominated funding obtained from abroad to strengthen macro financial stability and the monetary transmission mechanism. Accordingly, the RRR which was 12% for maturities up to 1 year for TL-denominated funds from repo transactions abroad has been differentiated across maturities and loans obtained from abroad have been raised to 18% for maturities up to one month, and 14% for maturities up to three months. We view the CBT’s recent move as a tightening measure aimed at curbing the decline in market interest rates observed in recent weeks. The reduction in the amount supplied through 1-week repo auctions (through policy rate), coupled with the RRR adjustment, suggests that the Bank is actively seeking to contain the decline in yields. Hence, while we do not anticipate a rate cut in June, we remain cautious but do not entirely rule out the possibility of a cut in July.

* The foreign investors were the net buyers on both the equity and bond markets in the week of May 9 – 16. Accordingly, the equity and the bond market (excluding repo transactions) experienced a net foreign inflow of USD245.2mn and USD1.9bn, respectively. Thus, foreign inflows into the equity market extended their streak for a fifth consecutive week, while the USD1.9bnn worth of foreign purchases in government bonds marked the strongest weekly inflow observed since the week of May 10, 2024. Besides, the foreigners’ share in total bond stock remained unchanged at 4.6%. Moreover, during the period of May 9 – 16, the residents’ FX deposits rose by USD544mn (excluding gold accounts and adjusted for the EUR/USD parity effect), while their total FX deposits (including gold, price adjusted) increased by USD865mn during the week of May 9 – 16.

* According to the results of the May Sectoral Inflation Expectations Survey, 12-month-ahead annual inflation expectations have retreated by 0.5pp to 25.1% for market participants and by 0.7pp to 41% for the real sector, while rising by 0.6pp to 59.9% for households. We assess that the sharp increase in household inflation expectations observed in May, following a relatively flat trend since February, was mainly driven by the heightened political angst and uncertainty that has prevailed since March 19. It’s worth noting that during last week’s Inflation Report presentation, the CBT Governor Karahan underscored that inflation expectations remain a key risk factor to the disinflation outlook.