Turkish market dips after cautious rate cut

• Cut of 1% below predictions
• Stock market rally eases off
• Worries over higher January inflation

Turkey’s central bank has again cut its policy rate but the reduction is below market expectations. 

The move underscores concerns that inflation could spike in the short term and slow the bull run on Istanbul’s heated stock exchange. 

The 100 basis point reduction announced on January 22 in the bank’s one week repo auction rate took its policy lending rate to 37 percent, continuing a cycle of easing that began in December 2024, when the interest rate was 50 percent. 

The 1 percent reduction was below market forecasts. Analysts predicted a cut of 1.5 to 2 percent in the days ahead of the decision. 

The bank’s caution reflects expectations that January inflation will come in above recent averages, with the bank flagging that “leading indicators suggest that monthly consumer inflation has firmed in January”. 

This firming was fuelled by increases in food and fuel costs and a raft of tax and charge rises for state services, typically announced at the beginning of the year. 

The 2025 year-end consumer price index stood at 31 percent, better than forecasts and well down on the 44 percent of 2024.

The lower than expected rate cut impacted the local stock market, which had been riding high since the beginning of the year. 

The İstanbul exchange has been on a run since the beginning of the year, in part reacting to expected improved inflation data.

Just before the rates decision was released, the blue chip BİST 100 index stood at a record high 12,805 points, having gained just under 14 percent since trading opened on January 2. However, the index eased off in the minutes after the central bank’s announcement. 

With the central bank only making a modest cut to its policy rate, this means the bond market will remain strong on the back of expected higher returns, said İris Cibre, financial analyst and founder of business advisory firm Phoenix Consultancy. Cibre said the softer move on rates was already impacting some shares. 

“When it comes to the stock exchange, we can see bank shares have given a very strong negative reaction, falling by 2.5 percent,” she told AGBI. 

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“With the expectations of higher inflation, bank shares were already somewhat iffy and today we had a strong sell on the banking sector.”

Though forecasting January inflation of 3.7 percent, Cibre says other sectors trading on the exchange were more positive, with sentiment driven by regional developments such as the increased stability in Syria.

“The wind is blowing behind us, especially on the issue of Syria,” she said. “We see buying on construction, cement and so on linked to the reconstruction of Syria.”