Turkey’s Slowing Growth Fuels Expectations of Further Rate Cuts

Turkey’s economy cooled more sharply than expected in the third quarter, prompting renewed discussion that the Central Bank of the Republic of Turkey (TCMB) may have room to continue its rate-cut cycle. Bloomberg’s assessment of the latest figures released by the Turkish Statistical Institute (TÜİK) highlights how weakening momentum could influence policy decisions over the next several months.

According to the newly published data, Turkey recorded 3.7% annual growth in the July–September period—well below Bloomberg’s economists’ survey forecast of 4.2%. The softer-than-anticipated performance reinforces concerns that domestic activity is losing steam after a period of substantial consumption-driven expansion.

However, the economy fared better every quarter. GDP increased 1.1% compared to the previous quarter, more than double the 0.5% expected in a separate Bloomberg poll. The mixed picture, slower year-on-year momentum but more vigorous quarter-on-quarter activity, creates a nuanced backdrop for monetary policymakers as they navigate inflation, demand, and financial stability.

Easing Cycle May Continue as Activity Cools

Bloomberg’s analysis suggests that the deceleration provides the central bank with fresh justification to keep lowering interest rates. TCMB resumed its easing path in July after a two-month pause, but later slowed the pace of cuts amid rising inflation pressures. By October, the policy rate had been reduced to 39.5%.

Several analysts believe that the publication of November inflation data could prompt the bank to reaccelerate the size of its cuts, especially if signs of disinflation continue. The central bank has repeatedly signaled that the balance between inflation trends and economic activity will guide its decisions.

Inflation Moderates but Remains Above Target

Turkey’s annual inflation eased to 32.9% in October, according to Bloomberg’s reporting. Forecasts for the end of the year place inflation in the 31–33% range, still notably higher than the central bank’s medium-term targets.

TCMB Governor Fatih Karahan stated last week that he expects a relative improvement in inflation indicators compared with previous months. Nonetheless, the bank remains under pressure to ensure that monetary and fiscal conditions remain tight enough to drive disinflation sustainably.

IMF: Lower Rates and Softer Fiscal Stance Will Lift Demand in 2026

In its post-visit statement following a November mission to Turkey, the International Monetary Fund projected that easing interest rates and a less restrictive fiscal stance would boost domestic demand in 2026. However, the IMF also warned that structural constraints and capacity limits could slow the pace of inflation’s cooling.

The Fund cautioned that recent adverse inflation readings suggest that current policy settings may not be sufficiently tight to anchor a meaningful disinflation process.

“Recent unfavorable inflation data suggest that monetary and fiscal policies may not be sufficiently tight for further disinflation,” the IMF said.

Economists Highlight Structural Imbalances Beneath the Headline Numbers

Reactions from Turkish economists reveal significant concerns about sectoral disparities, income distribution, and the sustainability of consumption-led growth.

Financial Markets Specialist Iris Cibre questioned how consumption could rise by 4.8% and services expand by 6.3% while the share of wages in national income has dropped to 35%. She noted that construction and services made the most significant contributions to growth, whereas agriculture contracted sharply by 12.7% and industry showed only a limited recovery.

“This so-called ‘fight against inflation’ is hurting wage earners, and we haven’t even reached the fourth quarter yet,” she added.

Former Central Bank Chief Economist Prof. Dr. Hakan Kara offered a contrasting interpretation, describing the growth tempo as “strong.” Kara emphasized that, despite major internal and external shocks earlier in the year and historically high real interest rates, the economy still posted quarterly expansions of 1.6% and 1.1%, equivalent to an annualized pace of around 5.5%.

Economist Burcu Aydın underscored the power of domestic demand, noting that household consumption rose by 2.1% and investments increased by 4%. She pointed out that external demand contracted 4.4%, weighing on headline growth. Regarding income distribution shifts, she observed that the wage share dropped to 35%, and the share of income allocated to fixed capital slid to a historical low of 19.4%.

Industry Indicators Send Mixed Signals

Economist Fatih Özatay highlighted the divergence between the industry value-added component of GDP and the industrial production index, which appear to be moving in opposite directions. His data showed that the industry’s value added grew by 0.2%, 2.2%, and 1% across consecutive quarters, while industrial output increased by 1.6%, 0.6%, and then contracted by 0.6% in the same periods.

“What exactly is happening?” he asked, emphasizing the need for clarity on underlying industrial trends.

Summarizing the distributional impact, Özatay added:

“Here’s the short takeaway from the GDP data: the corporate sector is doing exceptionally well. Don’t worry about their complaints — look instead at workers and retirees whose incomes sit below the hunger threshold.”