Turkey’s benign underlying inflation supports December rate cut
Per the full note from ING, Turkey's central bank has raised its 2025 inflation forecast to 21% from 15%, but the desk argues that benign underlying inflation dynamics—captured by a multivariate trend indicator running 6ppt below annual inflation—support a 100bp cut at the December meeting. The CBT kept its 2024 target at 24% while lifting forecasts for 2026 and the 2027-2029 horizon, bringing them closer to market expectations (23% for next year, 29.5% for 2026 versus 29.6% consensus). The note frames the governor's emphasis on declining underlying inflation as a green light for continued easing, with supply-side pressures expected to subside and annual inflation converging toward the trend measure. With no internal coverage on TRY pairs and no high-impact Turkish events on the near-term calendar, the desk's view is a standalone directional call on the easing cycle, not a cross-firm consensus trade.
What the desk is arguing
The desk frames Turkey's inflation report as a dovish setup, with the central bank explicitly signalling that underlying inflation is improving even as headline forecasts rise. Per the full note from ING, the CBT's multivariate trend inflation indicator stands 6ppt below annual inflation, reflecting the impact of the tight monetary stance on demand, expectations and pricing behaviour. That gap is the analytical core of the argument: as supply-side pressures fade, annual inflation should converge toward the lower underlying measure, justifying further easing.
The supporting evidence is a mix of upgraded forecasts and unchanged targets. The bank kept this year's inflation target at 24% but raised next year's to 21% from 15% and 2026 to 29.5% from 28%, bringing both closer to market expectations of 23% and 29.6% respectively. ING reads these revisions as a technical catch-up rather than a hawkish shift, and explicitly forecasts a 100bp cut in December. The alternative read would be that the upward revision to the 2025 forecast reflects stickier inflation than the central bank admits, which would argue for a slower easing path—but the desk rejects that by anchoring on the 6ppt underlying-inflation gap.
How other firms see it
The note is a single-house view, so there is no cross-firm grouping to report on the TRY path. What matters for the broader FX complex is the read-through to other EM central banks navigating similar disinflation dynamics.
Watch the EUR/USD trajectory for spillover into EM carry trades, and keep an eye on USD/TRY as the market prices the December decision. The 6ppt underlying-vs-headline gap is the key indicator to track—if it narrows, the desk's 100bp cut call loses its anchor.
What the calendar says
No high-impact Turkish events are scheduled over the next 30 days, so the December central-bank meeting is the next hard catalyst. In the interim, the market will trade off the inflation report's forward guidance and any shift in the underlying trend indicator, with global risk sentiment and the USD/TRY spot level as the main swing factors.
Key takeaways
- 01ING forecasts a 100bp CBT rate cut in December, citing a 6ppt gap between the multivariate trend inflation indicator and annual inflation.
- 02The CBT raised its 2025 inflation forecast to 21% from 15% and its 2026 forecast to 29.5% from 28%, both closer to market consensus.
- 03The desk interprets the revised forecasts as a technical catch-up rather than a hawkish signal.
- 04No high-impact Turkish data is due in the next 30 days; the December meeting is the next catalyst.
Market implications
Watch USD/TRY for the immediate reaction to the December decision, with the 6ppt underlying-inflation gap as the key signal. A narrowing of that gap would argue for a smaller cut and a firmer lira; a widening would validate the desk's 100bp call and likely pressure the currency.
Risks to this view
The call would be invalidated if the CBT delivers a smaller 50bp cut or holds, which would suggest the central bank is more concerned about the upward forecast revisions than the underlying trend. A sharper-than-expected rise in supply-side pressures—particularly from energy or the war—could also force a hawkish pivot and reverse the easing expectations.
Older quick take Quick take Published 13:43 Turkey Translate Turkey’s benign underlying inflation supports December rate cut Turkey’s central bank raised its inflation forecast for next year to 21% from 15% previously, bringing it closer to current market expectations of 23%. Its emphasis on declining underlying inflation also points to a continuation of rate cuts in December, in our view. We forecast a 100bp rate cut by Turkey's central bank in December Central Bank of Turkey Governor Fatih Karahan presented this year’s latest Inflation Report, unveiling updated projections at a time when market participants’ focus has increasingly shifted to next year.
In the meeting, Governor Karahan’s key message was that underlying inflation is improving. The multivariate trend inflation indicator provides further evidence of this and currently stands 6ppt below annual inflation, reflecting the impact of the CBT’s tight monetary stance on demand, inflation expectations and pricing behaviour. According to the governor, this suggests annual inflation should converge towards these underlying measures as supply-side pressures subside.
In our view, this assessment reinforces expectations that the CBT will continue cutting rates with another 100bp move in December. Compared with the previous report, the bank kept its inflation target for this year unchanged at 24%, while raising its targets for the next two years to 21% from 15% and 13.5% from 9%, respectively. These targets are separate from the bank’s inflation forecasts.
For 2026, the CBT raised its year-end inflation forecast to 29.5% from 28%, bringing it more in line with the latest market expectation of 29.6%. Citing continued uncertainty over the course of the war and reflecting the new Medium-Term Plan (MTP) macroeconomic framework, the bank also raised its forecast for next year to 21% from 15%. It expects inflation to decline to 9% by end-2029 before gradually converging towards its 5% medium-term target.
The upward revision for next year reflects changes in several key assumptions: higher oil prices, with the forecast raised to US$86.7 from US$76.4; a smaller decline in import prices due to disruptions to energy supply, higher refinery margins and rising transport costs; and an increase in the food inflation forecast to 24% from 19%, reflecting higher energy and transport costs as well as the outlook for agricultural commodity prices. In the current highly uncertain environment, the governor highlighted several risks to the inflation outlook: energy prices, with risks in both directions; food prices, which remain vulnerable to positive and negative supply shocks as well as war- and weather-related pressures on global prices; and “more frequent and successive supply-side shocks”, which could contribute to greater inflation inertia. On the downside, weaker domestic demand, reflecting the lagged effects of monetary tightening and a faster tightening in financial conditions, could ease inflationary pressures.
Regarding other issues discussed at the meeting, the governor also addressed recent volatility in investment funds. Citing a recent CBT study, he noted that companies exposed to funds subject to liquidation account for around 1.2% of total real-sector assets, 0.6% of employment, 0.9% of turnover, 1.1% of exports and 0.9% of outstanding commercial loans. Credit to the real economy has continued to flow uninterrupted, while potential spillovers through suppliers appear limited.
The central bank has also introduced measures to ease liquidity pressures and prevent volatility in investment funds from spilling over into other parts of the financial system. The 400bp decline in the effective cost of funding since August should also provide some support to companies. The governor highlighted several measures aimed at limiting the impact of fund volatility: supportive liquidity measures to contain contagion risks; purchases of TLREF-linked government debt held by investment funds in the secondary market; an exemption from credit growth limits for lending used to repay maturing corporate bonds; a measured easing of credit growth caps; and lower costs for the banking sector through remuneration of required reserves on longer-term TRY and FX non-deposit liabilities.
Governor Karahan thinks that one of the main transmission channels is likely to be the wealth effect stemming from the decline in equity prices. Historical evidence suggests that the impact of stock market-driven wealth effects on consumption has been limited. However, given the growing participation of retail investors in the equity market, the wealth effect may now be broader than in the past, though the bank has not provided a quantitative estimate at this stage, as it is difficult to assess how persistent the market correction will be.
If markets recover quickly, the impact is likely to remain limited. The sharp decline in consumer confidence in October may partly reflect the impact of these developments. Overall, investment fund-related volatility is likely to put further pressure on already weakening domestic demand.
Rather than increasing the overall level of support for companies as the TRY gradually strengthens, the central bank revised its FX conversion support scheme to improve access and target the available support more effectively. The Bank replaced the commitment not to purchase FX with an FX position ratio requirement and introduced a new value-added criterion, giving greater weight to firms with higher value-added, calculated as the sum of annual operating profit and labour costs. The bank also made it easier for suppliers producing goods for export to access FX conversion support.
Gross reserves dropped by US$49bn to US$161bn as of 6 November, from US$210bn before the start of the US-Iran conflict. Of this decline in reserves, US$28bn was due to the fall in gold prices. Net reserves (excluding swaps), on the other hand, declined by US$50.4bn in the same period, standing at US$28bn.
Dollarisation risk remains one of the factors being closely monitored by the central bank. Despite a series of shocks over the past three years, the preference for TRY assets has remained strong, suggesting that demand for TRY is resilient and continues to strengthen. However, this demand cannot be explained solely by factors such as the withholding tax rate or the level of interest rates.
The share of TL assets has continued to increase despite higher withholding taxes and lower interest rates. The decline in inflation and inflation expectations, together with improving confidence in the central bank, are other factors, also supporting demand for TRY-denominated assets. Lending has lost significant momentum in the second half of 2026, reflecting the tight monetary policy stance and measures including lower credit growth limits and a narrower range of exemptions.
As a result, total loan growth has slowed from 35% at the end of February to around 20%. Against this backdrop, the bank increased its loan growth caps this week as part of a gradual normalisation of the macroprudential framework following the tightening introduced at the start of the US-Iran war. The move also aims to support the monetary transmission mechanism, given the relatively moderate pace of loan growth and rising asset-quality risks.
Turkey Policy Rate Monetary Policy Inflation report Central Bank 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 Author Muhammet Mercan Chief Economist, Turkey Older quick take
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