Turkey’s Top Banker Sees Rate Cut Cycle Starting in November

Turkey’s central bank is likely to begin a cycle of interest rate cuts later this year with the cost of borrowing potentially being halved by the end of 2025, according to the chief executive of the country’s largest private-sector lender.

“The first cut may be in November and the policy rate may be cut to 47.5%,” Turkiye Is Bankasi Chief Executive Officer Hakan Aran told Bloomberg in an interview for the bank’s 100th anniversary. 2025 could see “the policy rate falling to 25%. Then banks’ balance sheets will see some respite,” he said.

Turkey’s return to orthodox monetary policy since the re-election of President Recep Tayyip Erdogan last year and the surge in rates to 50% to battle inflation have crushed margins at commercial lenders as demand for loans slumped. While the economy has grown every quarter since mid-2020, fears of a downturn are intensifying.

“I am not worried about a hard landing or a recession,” Aran said. “I believe the current policies will both lead Turkey to attain price stability and maintain growth, albeit slower than its potential,” he said, adding that he expects growth to slow to 3.5% and inflation to 42% at the end of the year.

The central bank led by Governor Fatih Karahan left the main interest rate on hold at 50% for a fifth month on Tuesday, aiming to reach its year-end inflation target of 38% from the current 62%. Aran sees the lira depreciating to between 38 and 39 against the US dollar in the same period.

Pressures on bank margins include high customer deposit costs, and the need to keep liquidity at the central bank as required reserves at a very low return, Aran said.

“The worst is over in terms of net interest margins as we don’t anticipate another rate hike,” Aran said, adding Isbank halved its net interest margin expectation to around 2% for this year. Weighted average interest rates stood at 61% for commercial loans and 58.5% for deposits of up to three months as Aug. 9, official data showed.

The high-interest rate environment will also lead to an increase in bad loans but Aran said non-performing loans – which grew mainly in credit cards and the retail segment – will remain at manageable levels. Turkish lenders’ average NPL ratio was 1.5% at the end of June, according to official data.

As the central bank tries to control loan growth, companies will turn to their reserves in lieu of borrowing, Aran said, adding he doesn’t expect caps on lending to be removed until 2026.

“Authorities won’t allow a loan boom before reaching inflation goals” next year, he said. “We have to hold our breath until the end of 2025.”

The central bank has recently reduced a monthly FX loan growth limit to 1.5% from 2% while keeping the growth limit for lira loans at 2% to help retain inflation.