This report does not constitute a rating action.
The Central Bank of the Republic of Turkiye (CBRT) hiked rates at its latest monetary policy meeting on April 17, following intense volatility in the domestic financial market toward the end of March and amid potential risks to disinflation. We now expect the CBRT to maintain this tight stance until summer when it is likely to resume its cycle of gradual easing.
What's Happening
The CBRT unexpectedly raised its main policy rate--the one-week repurchase agreement (repo) rate-- by 350 basis points to 46%. Concurrently, it raised its overnight lending rate to 49%, from 46%, and the overnight borrowing rate to 44.5%, from 41%. Those increases diverged from our earlier expectations and ended the bank's gradual easing cycle that was initiated toward the end of 2024. The rationale for the move includes the potential for upward pressure on April’s core goods inflation due to recent exchange rate depreciation, persistent domestic demand, and inflationary pressures stemming from global trade tensions.
Why It Matters
The hike will increase funding costs for banks in the short-term, further straining already tight margins. This is because liabilities reprice faster than assets, particularly loans, given Turkish banks’ balance sheet structure. Tighter credit conditions will also further limit banks’ growth opportunities over the coming months and may result in additional asset quality deterioration (with some time lag), due to new inflows of nonperforming loans, primarily from consumer and credit card loans. That said, we expect banks should have sufficient capital buffers to absorb the deterioration.
We now expect the revival in banks profitability will be delayed until towards the end of the year. Turkish banks already faced challenges, with sector wide nominal return on equity (RoE) declining to 30.5% by the end of 2024, from 43.7% in 2023, due to ongoing stringent financing conditions. Although we expect some margin improvement over the first quarter of 2025, due to previous CBRT rate cuts, we now foresee pressures resuming in the second quarter as banks' Turkish lira (TRY) interest margins are negatively correlated to local rates. We therefore anticipate that any improvement in banks’ profitability would depend on some reversal of CBRT’s monetary policy during the summer and might materialize only toward the end of 2025.
What Comes Next
The rate hike could be a pivotal step in reversing the recent increase in negative sentiment among investors and residents (see "Bulletin: Political Uncertainty In Turkiye A Risk To Reforms," March 24, 2025), and thereby potentially alleviate some of the refinancing pressure on banks. This is especially crucial as Turkish banks are entering the spring syndication season and still need to refinance about $107.9 billion over the next 12 months (based on data as of end-January 2025).
Moreover, the increase in the main policy rate, which will result in higher TRY deposit rates, could encourage some residents to keep their savings in local currency, which could ultimately help manage the risk of increasing dollarization. Foreign currency deposits accounted for 38.7% of total deposits, as of April 10, 2025, up from 36.3% as of March 13, 2025.
Related Research
- Bulletin: Political Uncertainty In Turkiye A Risk To Reforms, March 24, 2025
- Banking Industry Country Risk Assessment: Turkiye, Jan. 23, 2025
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| Secondary Contact: | Mohamed Damak, Dubai 97143727153; mohamed.damak@spglobal.com |
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