Melting net reserves, not inflation, now set the pace of CBRT cuts

The noise is the cut, the signal is in reserves

On 22 October the CBRT lowered its one-week repo rate from 37% to 36% and moved the corridor down by the same amount. The decision was no surprise: 32 of the 37 economists in the Matriks survey expected exactly this step. The committee cited leading indicators confirming a decline in the underlying trend, along with weak domestic demand. The same statement flagged energy prices, pushed up by geopolitical tensions, as an upside risk.

The real news arrived at 14:30. Weekly CBRT data showed gross reserves falling 2.48 billion dollars to 169.1 billion in the week to 16 October, with 2.42 billion of the drop coming from foreign currency holdings. Ahlatcı Yatırım calculates that net reserves excluding swaps fell 4.9 billion dollars in a week to 39.34 billion. That measure strips out FX swaps with banks and represents the buffer genuinely available to defend the currency. It has lost 23.26 billion dollars since the start of the year.

Constraint 1 · Carry is shrinking, the buffer is thinning

The lira's stability rests on the carry trade, in which foreign investors hold high-yielding lira assets and earn more than they lose on depreciation. The cut narrowed the gap between the policy rate and September's annual inflation of 29.73% from 7.27 points to 6.27. In a note on 22 October Commerzbank argued the lira is still overvalued in real terms. It wrote that nominal depreciation of roughly 20% a year lags inflation, and it expects 52 by year-end.

ING argued the same day that demand for carry will persist, forecasting a year-end policy rate of 35% and a dollar/lira rate of 51.50. The two banks draw different conclusions from the same data. What they share is the recognition that each cut lets the CBRT shrink carry returns by its own hand. As returns compress, continued inflows come to depend on the reserves themselves: investors hold their positions only for as long as they believe the central bank can defend the currency.

Constraint 2 · Foreign flows have already reversed

Non-residents sold 88.8 million dollars of equities in the week to 16 October, after 248.2 million the week before, extending the run to a third week. In bonds, Hibya puts the selling at 44.4 million dollars and Dünya at 60 million; the two figures conflict. The market value of foreign equity holdings fell in a week from 35.92 billion dollars to 33.98 billion. On decision day the BIST 100 fell 2.4% intraday to 11,295 points.

This comes after the fund crisis and MSCI's freeze of its Türkiye indices. Commerzbank writes that fund outflows have largely moved into lira deposits rather than foreign currency, which is why they have not derailed the cut. ING notes that developments in the funds pose a downside risk to domestic demand in the final quarter, with counterparty risk as the main channel of contagion.

What it means for Ankara

The CBRT's choice lies between supporting disinflation and protecting the buffer. In the Matriks survey 29 of 33 economists expect another cut on 10 December, and the year-end median is 35%. That path assumes net reserves excluding swaps stabilise around 39 billion dollars. If reserves keep melting for another two or three weeks, the December move will either shrink or be postponed; upside risk from energy prices makes that outcome more likely.

Fiscal policy tightens the constraint. In the 2027 budget submitted to parliament on 21 October, interest spending of 3.975 trillion lira on its own exceeds the 3.868 trillion lira deficit. High rates strain the budget while low rates strain the currency, and the weekly reserve data trace the narrow corridor between the two. The summary of the meeting on 30 October and the Inflation Report on 12 November will show how much weight the committee gives to the reserve trend.

What would falsify this reading

A return of net reserves excluding swaps above 44 billion dollars within the next 3 weeks, together with foreigners turning buyers again in equities and bonds, would show the constraint loosening. October inflation would then become the main driver, and a cut of 100 basis points or more in December would become plausible. Conversely, if dollar/lira breaches 52 before the year is out, the buffer will have proved inadequate and the cut will have been paid for through the exchange rate.