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.