Turkey's Inflation Slowdown and Central Bank Policy Outlook for 2025: Assessing the Viability of Further Rate Cuts and Their Implications for Turkish Equities and Foreign Investment

A Dovish Turn: The CBRT’s July 2025 Rate Cut and Inflation Dynamics

Turkey’s Central Bank of the Republic of Türkiye (CBRT) has signaled a pivotal shift in monetary policy, cutting its key one-week repo rate by 300 basis points in July 2025 to 43%—the first easing move since April 2025 [1]. This decision was driven by a marked slowdown in inflation, which fell to 33.5% in July 2025, the lowest level since November 2021 [2]. The CBRT has set interim inflation targets of 24% for the end of 2025 and 16% for 2026, reflecting its commitment to a disinflationary path [3]. Governor Fatih Karahan emphasized the need for continued fiscal-monetary coordination to stabilize prices, underscoring the bank’s cautious optimism about achieving these goals [4].

The Case for Further Rate Cuts: Inflation Trends and Policy Flexibility

The CBRT’s July easing was more aggressive than anticipated, with analysts now forecasting additional cuts as inflation continues to decelerate. According to a report by Bloomberg, consumer price growth is expected to fall further, potentially enabling the policy rate to drop to 34% by year-end 2025 [5]. This projection is supported by the CBRT’s own inflation forecasts, which suggest a gradual alignment with its 2026 target. However, the bank has stressed that rate reductions will remain “meeting-to-meeting” decisions, contingent on inflation data and global economic conditions [6].

Equity Market Rally: Rate Cuts as a Catalyst for Investor Confidence

The CBRT’s dovish pivot has invigorated Turkey’s equity markets. The Borsa Istanbul 100 Index surged 1.6% in August 2025, adding to a 25% gain since May 2025 [7]. This rally reflects improved sentiment around monetary easing and disinflation, with analysts noting that further rate cuts could extend the upward trend. Reuters highlights that foreign investors, drawn by Turkey’s strategic location and attractive valuations, are increasingly allocating capital to local equities, particularly in export-driven sectors like construction and steel [8].

Foreign Investment Inflows: A Return to Optimism

Foreign Direct Investment (FDI) in Turkey’s first half of 2025 reached $6.3 billion, a 27.1% increase compared to the same period in 2024, with the Netherlands, Kazakhstan, and the U.S. leading inflows [9]. Portfolio equity inflows also rebounded, with $1.387 billion entering local markets in 2023, signaling renewed confidence in Turkey’s economic resilience [10]. While political turbulence—such as the arrest of Istanbul mayor Ekrem Imamoglu in early 2025—temporarily dented investor sentiment, the CBRT’s stabilization efforts and declining inflation have restored momentum [11].

Risks and Considerations: Currency Volatility and Geopolitical Uncertainty

Despite the positive outlook, challenges persist. The Turkish lira’s depreciation has dampened dollar-denominated returns for foreign investors, and geopolitical tensions in the region remain a wildcard [12]. Additionally, while the CBRT’s rate cuts aim to stimulate growth, high inflation and structural fiscal imbalances could limit the pace of monetary easing.

Conclusion: A Strategic Opportunity Amid Caution

Turkey’s inflation slowdown and the CBRT’s dovish policy trajectory present a compelling case for further rate cuts in 2025. These developments are likely to bolster equity markets and attract foreign capital, particularly in sectors aligned with Turkey’s export potential and reconstruction efforts. However, investors must remain vigilant about currency risks and macroeconomic volatility. For those with a long-term horizon, Turkey’s strategic position and improving macroeconomic environment may offer attractive opportunities in an increasingly competitive global market.

Source:
[1] Turkish central bank says rate steps to remain prudent ... [https://www.dailysabah.com/business/economy/turkish-central-bank-says-rate-steps-to-remain-prudent-inflation-focused]
[2] Turkish central bank introduces new interim inflation targets [https://www.dailysabah.com/business/economy/turkish-central-bank-introduces-new-interim-inflation-targets]
[3] Press Release on Interest Rates (2025-41) [https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en/main+menu/announcements/press+releases/2025/ano2025-41]
[4] Turkish Inflation Surprise Paves Way for Further Rate Cuts [https://www.bloomberg.com/news/articles/2025-08-04/turkish-inflation-slows-more-than-expected-to-33-5-in-july]
[5] Turkish central bank returns to easing, cuts key rate to 43% [https://www.dailysabah.com/business/economy/turkish-central-bank-returns-to-easing-cuts-key-rate-to-43]
[6] Turkey Monetary Policy July 2025 [https://www.focus-economics.com/countries/turkey/news/monetary-policy/turkey-central-bank-meeting-24-07-2025-central-bank-cuts-rates-in-july]
[7] Turkish Stocks Sail to Record High on Rate Cut Expectations [https://www.bloomberg.com/news/articles/2025-08-21/turkish-stocks-set-for-record-close-on-bets-for-more-rate-cuts]
[8] Foreign investors bet on Turkey, drawn by rate cuts, easing inflation [https://www.reuters.com/world/middle-east/foreign-investors-bet-turkey-drawn-by-rate-cuts-easing-inflation-2025-01-24/]
[9] Türkiye Sees Significant Surge in FDI in First Half of 2025 [https://www.invest.gov.tr/en/news/news-from-turkey/pages/turkiye-sees-significant-surge-fdi-first-half--2025.aspx]
[10] Turkey - Portfolio Equity, Net Inflows (BoP, Current US$) [https://tradingeconomics.com/turkey/portfolio-equity-net-inflows-bop-us-dollar-wb-data.html]
[11] Turkish financial markets temporarily under pressure following political turbulence [https://blog.en.erste-am.com/turkish-financial-markets-temporarily-under-pressure-following-political-turbulence/]
[12] Turkish Stocks Sail to Record High on Rate Cut Expectations [https://www.livemint.com/market/stock-market-news/turkish-stocks-sail-to-record-high-on-rate-cut-expectations-11755807052819.html]