Monitoring Turkey: Geopolitical relief to support disinflation
The desk asserts that easing geopolitical tensions around Turkey, along with promising inflation data, may pave the way for the Central Bank of Turkey (CBT) to adopt a more accommodative monetary stance. Per the full note from ing-think, July's better-than-expected consumer price index reinforces a disinflationary trend, aided further by improving foreign reserves linked to a significant $14.8 billion in FX purchases in June. This backdrop suggests the CBT could initiate liquidity easing by late August or September, depending on forthcoming inflation readings and reserve dynamics.
What the desk is arguing
The desk believes that geopolitical relief and declining inflation in Turkey are set to support monetary easing by the CBT. The July CPI data supports a sustained downtrend in annual inflation, easing concerns from energy prices and geopolitical risks; this has been highlighted by analysts like Muhammet Mercan and Frantisek Taborsky in their commentary.
This assessment is bolstered by the notable improvement in Turkey's net foreign exchange position, which saw an uptick of $14.8 billion in FX reserves during June, directly contributing to a favorable outlook for inflation. The anticipation for a potential policy rate refocus to 35% in Q4 underlines the proactive flexibility the CBT is adopting in light of evolving economic conditions.
Where it sits in our coverage
Our consensus targets suggest a range for USD/TRY of 1.075, with notable contributions from firms like: - jpmorgan: 1.10, Mar-26 - bofa: 1.04, Mar-26
This desk's call aligns closely with jpmorgan, suggesting an upward trajectory for the lira as geopolitical tensions ease, whereas bofa diverges with a more cautious stance at the lower end of the range.
How other firms see it
Aligned firms, including jpmorgan, are supportive of a stronger Turkish lira due to improved economic conditions, while bofa takes a contrary view, citing persistent external risks.
Focus on related pairs such as EUR/TRY and the trajectory of crude oil prices, as shifts here will likely reflect CB policies and inflation dynamics moving forward.
01Turkey's annual inflation shows a downtrend, with significant geopolitical easing contributing to a positive outlook.
02The CBT may move towards liquidity easing as foreign reserves improve, potentially by August or September.
03Analysts anticipate a policy rate stabilization or reduction towards 35% in Q4 2023.
04Geopolitical developments, especially in relations with Iran, could significantly impact Turkey's economic landscape.
Market implications
Traders should monitor the USD/TRY pair, particularly around the 1.075 level for potential shifts in sentiment following inflation prints or policy signals from the CBT. Any moves towards liquidity easing could catalyze a stronger lira.
Risks to this view
A resurgence of geopolitical tensions or negative surprises in subsequent inflation data could undermine the positive narrative and force the CBT to maintain or even increase interest rates. Moreover, prolonged energy price volatility could negate the current favorable disinflation outlook.
Articles Monitoring Turkey: Geopolitical relief to support disinflation Published 14:50 Turkey Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download July data reinforced the downtrend in annual inflation, with risks from energy prices and geopolitics easing. Meanwhile, rising reserves and easing Gulf tensions are bringing the timing of the Central Bank of Turkey's liquidity easing into sharper focus Muhammet Mercan , Frantisek Taborsky and James Wilson Turkey's economy at a glance Better-than-expected July CPI data helped maintain a downtrend in the annual figure, though pricing pressures were relatively broad-based, with the impact of geopolitics, administrative hikes and unprocessed food leading to an increase in the seasonally adjusted monthly inflation. While the government’s decision to gradually unwind the sliding scale mechanism adds to the challenges, the resumption of the Iran-US peace process, on the other hand, would ease geopolitical tensions and help oil prices return to prewar levels, which in turn would be supportive for the inflation outlook.
While all policy options continue to be available for the Central Bank of Turkey (CBT) with a clear intention of preserving flexibility in policymaking depending on changing geopolitical conditions, it has remained in a wait‑and‑see approach before deciding whether to reduce the effective cost of funding back towards the policy rate. A new deal in the US-Iran conflict would create room for the bank to normalise the effective funding rate within August or September, depending on inflation and reserve dynamics. The baseline scenario still points to a policy rate move toward 35% in the final quarter.
The CBT’s net foreign exchange position improved during June and July, supported by FX purchases of US$14.8bn in June, adjusted for gold price effects and including exporters’ surrender requirements, followed by a further $9.0bn in July. Reserve accumulation is likely to continue, aided by gradual capital inflows and seasonal current account support. To provide additional support for the corporate sector, the budget for the Investment Commitment Advance Loan programme has been increased from TRY 500bn to TRY 750bn, creating an additional TRY250bn in capacity, a new working capital support package of TRY 250bn has been announced, and a hike in the daily rediscount credit limit by TRY500mn is likely to provide roughly TRY125bn in additional annual gross lending capacity.
As a result, the total increase reaches TRY625bn, translating into 3.1% of the total cash business loans. Fitch Ratings affirmed Turkey’s BB- long-term foreign-currency credit rating and stable outlook, in line with expectations, citing the country’s low public debt, large and diversified economy, and resilient banking sector as key strengths, while noting that high inflation, limited external liquidity, substantial external financing needs, and risks to monetary policy credibility continue to constrain the rating. Moody’s also completed its latest review of Turkey and, in line with expectations, affirmed the country’s Ba3 credit rating and stable outlook.
Quarterly forecasts Source: Various sources, ING "> Source: Various sources, ING FX and rates outlook Last month, the Turkish lira experienced its largest monthly depreciation against the US dollar since July 2025, but attractive carry continues to support investor demand for the currency. Long TRY positioning has fully recovered to pre-US-Iran conflict levels, suggesting that confidence in Turkish assets and the broader macro framework is rebuilding. At the same time, FX reserves continue to recover gradually and remain in a comfortable territory, reinforcing external stability.
Looking ahead, we expect carry trades to remain the dominant driver of FX flows and see little risk of any changes to the current FX policy regime in the foreseeable future. The rates market remains focused on the outlook for monetary easing, with investors pricing around 250bp of policy rate cuts by year-end, slightly above our forecast, and expecting the effective funding rate to converge towards the key policy rate by September. Since the market sell-off in May, trading has become more range-bound, while the central bank has continued to fund at the upper band as the repo window has remained closed since the start of the US-Iran conflict.
The yield curve has re-steepened back to levels seen before the conflict, reflecting improved sentiment and expectations of eventual easing. Further progress in inflation and a continuation of the disinflation trend will be needed for markets to price a more aggressive cutting cycle. However, the outlook remains highly dependent on developments in the US-Iran conflict given Turkey’s significant exposure to energy prices and external shocks through higher oil costs.
CBT reserves (US$ bn) Sovereign credit views Spreads on Turkey's dollar sovereign bonds have recovered from the sell-off earlier this year related to war in the Middle East and domestic politics, although they still remain at the wide end of the rating tier, with around a 40bp pickup over the BB average. Strong fiscal performance this year is balanced against a slight deterioration in the current account position, keeping fundamentals relatively stable, while the FX reserve picture has stabilised and the monetary policy stance remains cautious. In terms of issuance, progress has been solid so far towards the full-year plan for Eurobond financing, although there remains scope for one or two more deals after the summer lull in the primary market.
In this context, Turkish sovereign credit should remain relatively attractive for investors, in particular if there are positive developments in the US-Iran conflict, with the front end of the USD curve offering the most interesting pickup over peers after recent curve flattening. US$ Bond Sub-Index Spreads vs USTs Source: Refinitiv, ING "> Source: Refinitiv, ING Annual inflation eases, but underlying pressures pick up Monthly inflation in July was 1.8% vs the market consensus of 1.96%, while annual inflation maintained a downtrend to 31.8% (vs the CBT’s target of 24% and forecast of 26% in the latest inflation report) from 32.1% a month ago. Despite unprocessed food and administrative prices pushing inflation higher, the positive surprise was attributable to some non-food groups last month.
Pricing pressures, on the other hand, were relatively broad-based, leading to an increase in the seasonally adjusted monthly inflation. Core inflation (CPI-C) rose 1.8% MoM, broadly in line with the increase recorded a year earlier, pushing the annual rate up to 29.9%. However, the central bank's managed exchange rate policy, which has kept nominal lira depreciation modest in recent months, helped contain the rise.
In other words, although the average increase in the USD/TRY stood at 1.7% in July compared to the previous month, its annual increase remaining at around 17% – significantly below inflation in the same period – indicates that the CBT has maintained its exchange rate policy, which continues to support the disinflation objective through the cost channel. In July, PPI stood at 1.5% MoM and fell to 27.8% YoY, the lowest in the last five months, while more than half of the monthly increase was driven by electricity and gas production. Global commodity prices and particularly oil prices in the current geopolitical backdrop will remain the key risk factors to the PPI, which is on a gradual uptrend.
Inflation expectations and CBT forecast (12m- ahead, YoY%) Source: CBT, Bloomberg, ING "> Source: CBT, Bloomberg, ING Central Bank stays on hold, citing geopolitics In the July meeting, the CBT kept its policy rate (1-week repo rate) unchanged again, leaving it at 37%, and the interest rate corridor stable with the upper and lower bands remaining at 40% and 35.5%, respectively, all in line with expectations. Accordingly, the bank has continued to fund from the upper band as the repo window has been closed since the start of the US-Iran conflict. Before the reviving geopolitical tensions in the Gulf, the prevailing expectation was for the bank to ease through its liquidity tools and allow a drop in the effective cost of funding, either gradually or with full normalisation from 40% to 37%.
The key reason for this was the decline in financial stability concerns and relative improvement in the expectations surrounding the macro outlook with the announcement of the US and Iran Memorandum of Understanding. However, the policy outlook shifted in mid-July with rising geopolitical uncertainty pushing oil prices close to US$100 per barrel from the $70-75 range seen during the ceasefire. In the MPC statement, pointing out a resuming uptrend in energy prices, the bank has maintained its cautious stance with the return of financial stability concerns.
The policy rate vs. interbank O/N rate Source: CBT, Bloomberg, ING "> Source: CBT, Bloomberg, ING Domestic demand continues to moderate In the July MPC, the central bank acknowledged that recent leading indicators confirm ongoing weakening in domestic demand. Accordingly, elevated borrowing costs and recent further tightening in macroprudential measures seem to be translating into a more marked slowdown this year, with the deceleration in consumer loans and card spending. This should help prevent broad-based second-round effects from the energy price developments.
In July, the business tendency survey showed that manufacturing firms expect a significant weakening in domestic demand over the next three months, though they see some improvement in near-term external demand. Regarding sectoral confidence indices in July, demand expectations for the next three months signal some deterioration in retail trade and construction, though they showed a modest recovery in services. Real GDP (%YoY) and contributions (ppt) Source: TurkStat, ING "> Source: TurkStat, ING July PMI inched up into contractionary territory The manufacturing sector PMI moved slightly up in July to 47.7 from 47.1 a month ago (on a seasonally adjusted basis).
It has remained in contractionary territory, which has been the case for more than two years, pointing to long-standing challenges for manufacturers. In the breakdown, while the rate of inflation in input prices further eased to the slowest since November 2025, subdued demand suggested by slowing new orders led manufacturers to scale back their production in addition to their purchasing activity and inventories. Findings in the sectoral PMIs reinforced the views related to the impact of the war on economic activity, as all 10 sectors except apparel and non-metallic minerals positioned below the 50 level.
In comparison to a month ago, half of the sectors recorded PMI increases, supported by softening in inflationary pressures that, in return, supported increases in new orders and production. PMI & Business Confidence Source: ICI, CBT, ING "> Source: ICI, CBT, ING Unemployment rate falls to its lowest level since 2005 According to the seasonally adjusted data, the number of unemployed people fell by 168K from the previous month, reaching 2.7m. The unemployment rate declined by 0.5ppt on a monthly basis to 7.6%, marking the lowest level in the data series published since 2005.
Meanwhile, the labour force participation rate stood at 52.9%. The data showed that the decline in the headline unemployment rate was attributable to the growth in employment outpacing the increase in the labour force. Broader measures of unemployment also pointed to an improvement compared with the previous month.
Among those, the inactive labour force rate, which comprises time-related underemployment, the potential labour force, and unemployed persons, dropped by 2.0ppt to 28.8% in June. Although this indicator is typically volatile, it has been on an upward trend for some time. Labour market outlook Source: TurkStat, ING "> Source: TurkStat, ING Higher-than-expected current account deficit in May In May, the current account posted another deficit at $1.5bn, exceeding expectations.
Following the data, the 12-month rolling current account deficit reached $37.3bn, or approximately 2.3% of GDP, from $36.9bn a month ago. A closer look at the monthly figures shows a narrower goods deficit, a softer services surplus and a deteriorating primary income deficit. A narrower gap in goods trade, on the other hand, is driven by a higher energy bill due to the US-Iran war, despite the turn of the core trade deficit to a surplus and lower net gold imports.
The trade data of a $10.4bn deficit in June suggest further deterioration in the current account. The capital account was weak, with net outflows at $1.8bn. With almost flat net errors and omissions (at $-0.1bn), and considering the current account deficit, official reserves recorded a US$3.3bn fall in May.
Current account (12M rolling, US$bn) Source: TurkStat, CBT, ING "> Source: TurkStat, CBT, ING Strong June budget with strong income tax collection The Central Administration budget balance showed a significant improvement in June, following some weakness in May. This is attributable to month-to-month shifts in tax collection timing supporting revenue performance in addition to a calendar effect related to the Bayram holiday. On a 12-month rolling basis, the budget deficit narrowed to -2.4% of GDP in June, from -3.1% in May, while the primary balance improved to a surplus of +0.9% of GDP from 0.4%.
Looking at June alone, tax revenues rose by 72% year-on-year, reflecting an acceleration in direct tax collection driven by income tax, while indirect tax generation remained modest due to losses in fuel-related taxes following the reinstatement of sliding scale tariffs. The government’s decision to gradually unwind the sliding scale mechanism until October (by reducing the absorption rate of any rise in fuel prices through cuts to special consumption tax – SCT – from 75% to 50% through July and to 25% in August and September) would limit the erosion of SCT collections. Budget performance Source: Ministry of Treasury and Finance, ING "> Source: Ministry of Treasury and Finance, ING Turkey Sovereign rating Monthly Update Monitoring Emerging markets Emerging market debt Economy Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Muhammet Mercan Chief Economist, Turkey Muhammet Mercan is Chief Economist at ING, Turkey. Previously, he was an economist at Yapi Kredi and HSBC Securities.
He is a part-time lecturer at Bilgi University and holds a PhD degree in… Frantisek Taborsky EMEA FX & FI Strategist Frantisek is an FX & FI Strategist covering EMEA markets, having joined the bank in 2022. He provides short- and medium-term recommendations for ING's corporate and institutional client… James Wilson EM Sovereign Strategist James is an EM Sovereign Strategist, having joined ING in 2022. He provides analysis on hard-currency sovereign bonds, primarily in the CEEMEA region.
James previously worked at independent… In this article Turkey's economy at a glance FX and rates outlook Sovereign credit views Annual inflation eases, but underlying pressures pick up Central Bank stays on hold, citing geopolitics Domestic demand continues to moderate July PMI inched up into contractionary territory Unemployment rate falls to its lowest level since 2005 Higher-than-expected current account deficit in May Strong June budget with strong income tax collection