Introduction to Turkey’s Economic Shift
Turkey’s Central Bank of the Republic of Türkiye (CBRT) has made a significant move in its monetary policy by cutting its key one-week repo rate by 300 basis points in July 2025 to 43%. This is the first easing move since April 2025. The decision was driven by a noticeable slowdown in inflation, which decreased to 33.5% in July 2025, marking the lowest level since November 2021. The CBRT has set interim inflation targets of 24% for the end of 2025 and 16% for 2026, showcasing its commitment to a disinflationary path. Governor Fatih Karahan stressed the importance of continued fiscal-monetary coordination to stabilize prices, reflecting the bank’s cautious optimism about achieving these goals.
Understanding the Rate Cut Decision
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. This projection is supported by the CBRT’s own inflation forecasts, which suggest a gradual alignment with its 2026 target. However, the bank has emphasized that rate reductions will remain "meeting-to-meeting" decisions, contingent on inflation data and global economic conditions.
Impact on Equity Markets
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. This rally reflects improved sentiment around monetary easing and disinflation, with analysts noting that further rate cuts could extend the upward trend. 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.
Foreign Investment Trends
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. Portfolio equity inflows also rebounded, with $1.387 billion entering local markets in 2023, signaling renewed confidence in Turkey’s economic resilience. While political turbulence temporarily dented investor sentiment, the CBRT’s stabilization efforts and declining inflation have restored momentum.
Challenges and Considerations
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. 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
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.
