Goldman Sachs: Funding crisis tightened Turkish financial conditions by 100 points in September alone

Goldman Sachs warned in a report issued on November 12 that turbulence in funding markets produced a tightening in Turkish financial conditions of 100 basis points in September alone, according to the bank's quantitative financial conditions index. The report stated that this index has returned to its tightest level of the current cycle, that is, the level recorded just before the easing cycle began in 2024.

The bank expects this tightening to reduce economic growth by 0.7 percentage points over the coming quarters. The report also noted that credit growth is still slowing despite the easing of some macroprudential requirements and the start of the rate-cutting cycle, stressing that this pattern has not recurred in similar previous cycles. Goldman Sachs considered the latest amendments to credit rules an attempt to halt this slowdown, expecting that officials will continue to focus on this issue in the coming months.

In contrast to the position of the Central Bank of the Republic of Turkey (TCMB), which described the impact of the funding crisis as "limited," Goldman Sachs took the view that the effect is far more severe, pointing out that domestic demand has passed its trough and that core inflation has begun rising again. The report cautioned that the central bank did not address in its latest inflation report the reserve losses stemming from the financial account or the balance of payments, elements that Goldman Sachs sees as more important for the sustainability of the economic program. On the other hand, the bank welcomed the Turkish central bank's expansion of current account coverage in the latest inflation report compared with previous reports.

At the same time, the report explained that the remarks of central bank governor Fatih Karahan and members of the Monetary Policy Committee, which devoted considerable attention to the slowdown in core inflation and weak domestic demand, may raise the probability of a rate cut in December. However, Goldman Sachs quoted Karahan as explicitly affirming that forecast revisions do not mean a loosening of monetary policy conditions. The bank's base case remains that the policy rate will be held steady at that meeting.

Karahan reported that the ambiguity surrounding fiscal policy and questions regarding the duration of the war with Iran were among the factors that led to the postponement of the revision of forecasts for 2026 and beyond in the previous inflation report, noting that the updates in the latest report reflect a more comprehensive assessment and are not merely a response to immediate developments. According to Goldman Sachs, Karahan explained that demand for foreign currency is not linked to interest rates alone, but that the withholding tax also plays a role in it, and that the improvement in inflation expectations and confidence in the central bank has so far limited the shift toward dollarization despite the decline in yields. The report also noted that the central bank may resort to macroprudential tools — including tax adjustments — to control demand for foreign currency even as rate cuts continue.