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Turkish Stocks Soar as Rate Cut Expectations Fuel Record Rally

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  Published in Stocks and Investing on Thursday, August 21st 2025 at 5:01 GMT by Bloomberg L.P.
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Turkish equities are experiencing a historic surge, poised to close at record highs fueled by escalating expectations that the Central Bank of Turkey (CBT) will continue its aggressive interest rate cutting campaign. The rally, which has been building momentum throughout 2025, reflects a broader shift in investor sentiment towards Turkish assets and a belief that the CBT’s policy easing can sustainably curb inflation without derailing economic growth.

The benchmark BIST 100 index is on track to surpass previous highs reached earlier this year, driven by strong performances across various sectors including banking, energy, and construction. This surge follows months of significant monetary loosening implemented by the CBT under Governor Fatih Karacan, who took office with a mandate to reverse years of restrictive policies that had stifled economic activity. Since January 2025, the CBT has slashed its policy rate from an eye-watering 45% to just 17%, a move unprecedented in scale and speed within developed economies.

The driving force behind this bullish market sentiment is the perceived success of these aggressive cuts in taming inflation. While still above the CBT’s target range, annual consumer price index (CPI) has fallen considerably from its peak of over 60% last year to a current level hovering around 35%. This disinflationary trend, coupled with signs of stabilizing the Turkish Lira (TRY), has emboldened investors who previously shied away from the market due to concerns about currency volatility and high inflation.

However, the rally hasn't been without its complexities and potential risks. The rapid depreciation of the TRY in 2023 and early 2024 had initially fueled inflationary pressures, prompting the previous CBT leadership to maintain a hawkish stance. Karacan’s strategy hinges on the belief that further rate cuts will stimulate domestic demand and investment, ultimately boosting economic growth and contributing to a virtuous cycle of disinflation. This approach is predicated on the assumption that the TRY will remain relatively stable despite the lower interest rates – a crucial factor for sustaining the rally.

The CBT has employed various measures to support the currency, including foreign exchange reserves management and verbal interventions in the market. While these efforts have yielded some success in stabilizing the TRY, concerns linger about the sustainability of this stability given Turkey’s significant external debt burden and reliance on portfolio inflows. A sudden reversal in investor sentiment could trigger a renewed depreciation of the Lira, potentially reigniting inflationary pressures and jeopardizing the CBT's policy objectives.

Furthermore, the rally has attracted considerable foreign capital, which has contributed to the upward pressure on stock prices. While this influx is generally positive for the market, it also makes Turkish equities more vulnerable to shifts in global risk appetite. A broader sell-off in emerging markets could disproportionately impact Turkey given its relatively high exposure to foreign investment.

Analysts are divided on how much further the rally can extend. Some believe that the CBT’s commitment to easing monetary policy provides ample room for continued gains, particularly if inflation continues to moderate and the TRY remains stable. Others caution that the market is becoming increasingly overvalued and vulnerable to a correction. The recent performance of Turkish banks, which are heavily influenced by interest rate movements, has been particularly noteworthy, with their stock prices reaching levels not seen in years.

The government’s economic policies also play a crucial role in shaping investor sentiment. While the CBT's monetary policy is paramount, fiscal discipline and structural reforms are essential for ensuring long-term sustainable growth. The Turkish government has pledged to implement measures aimed at improving the business environment and attracting foreign direct investment, but progress on these fronts has been slow.

Looking ahead, the CBT’s next policy decision will be closely watched by investors. While a further rate cut is widely anticipated, the pace and magnitude of any easing will depend on incoming economic data, particularly inflation figures and TRY performance. The market's reaction to this decision will likely set the tone for the remainder of 2025 and beyond.

In conclusion, Turkish stocks are enjoying a remarkable rally fueled by aggressive monetary policy easing and improving macroeconomic conditions. While significant risks remain, the current environment suggests that the upward trend is likely to persist, at least in the short term, as investors bet on further rate cuts and continued disinflation. However, vigilance regarding currency stability, external debt levels, and global risk sentiment will be crucial for navigating the potential challenges ahead and ensuring the sustainability of this record-breaking rally.