Interest and inflation forecast for Türkiye from the giant bank

Source: News Center

Morgan Stanley expects the Central Bank of the Republic of Turkey (CBRT) to gradually lower its policy rate to 37 percent by the end of this year and 26 percent by the end of 2026.

In a report published after its visit to Türkiye, Morgan Stanley stated that the announced Medium-Term Program (MTP) will maintain macro policy momentum and provide resilience to shocks. The institution emphasized that the expected continuity in monetary and fiscal policies will support the economic recovery.

According to a report on ekonomim.com, Morgan Stanley emphasized that the Medium-Term Program (MTP) envisions growth moderation and gradual fiscal consolidation to support the fight against inflation, citing a commitment to aligning publicly determined wages and prices with inflation targets. The institution stated that the significant fiscal adjustment observed starting in the second quarter of 2025 is promising for domestic demand adjustment and future disinflation.

Morgan Stanley believes the Central Bank of the Republic of Turkey (CBRT) has policy leeway in terms of reserves, interest rates, and macroprudential tools, expressing the view that this will enable it to support exchange rate stability and limit residents' demand for foreign currency despite domestic news flows. The institution predicts that inflation will continue next year, but at a slower pace than government targets due to resilience in domestic demand, sticky services inflation, and high expectations. It also projects that inflation will decline to 30% by the end of 2025 and 21% by the end of 2026.

While the bank expects interest rate cuts to be gradual, reaching 37 percent by the end of 2025 and 26 percent by the end of 2026, it emphasized that real interest rates will remain relatively high.

Morgan Stanley noted that investors may still prefer short dollar/TL trades as carry trades if the Central Bank maintains its cautious policy, and stated that the one-year OIS curve will continue to be used. The institution believes that country risk premiums will remain stable in the near term due to the continued support of the reform program by the authorities, and predicted that the announced issuances will be concentrated in the middle of the curve, leading to a marginal flattening of the 10-30-year curve.