Deutsche Bank/Onay: Türkiye’s Inflation Risks, Rate Cuts, and OVP Projections

Deutsche Bank Türkiye economist Yiğit Onay evaluated the government’s newly announced Medium-Term Program (OVP) on Bloomberg HT, noting that while the plan outlines a lower growth trajectory and falling inflation expectations, some targets remain overly optimistic beyond 2026.

Growth and Inflation Forecasts: Close to Deutsche Bank’s Projections

Onay said that the OVP’s 3.3% growth forecast for 2025 and 3.8% for 2026 align with Deutsche Bank’s internal estimates. He also highlighted the government’s inflation goal of 28.5% by the end of 2025, slightly below the Central Bank of Türkiye’s (TCMB) upper projection band of 29% and Deutsche Bank’s own forecast of 29.5%.

“The program suggests a scenario where the economy won’t be overstimulated, but also won’t be sharply slowed down. However, the inflation targets for 2026 and beyond appear somewhat optimistic,” Onay noted.

Rate Cuts on the Horizon

Onay expects the TCMB to deliver a 200 basis point rate cut this week, lowering the policy rate closer to 41%. Deutsche Bank’s year-end forecast is 37%.

“Considering stronger-than-expected growth and inflation data along with domestic political developments, we think the TCMB will proceed cautiously with a 200 basis point cut. A 250–300 basis point reduction cannot be ruled out,” Onay said, pointing to comments by TCMB Governor Fatih Karahan that reinforced expectations of easing.

Inflation Outlook: Low Risk of Stagnation at 30%

Onay argued that the risk of inflation remaining stuck around the 30% level is limited. He cited several supportive factors:

• Currency stability,

• Moderating wage pressures,

• Weaker domestic demand,

• Gradual improvement in inflation expectations.

He added:

“As long as policy commitment continues, we see little risk of inflation being trapped at 30%. The pace at which inflation approaches 20% in 2026 will be critical. The 20% mark is an important threshold in terms of inflation stickiness and expectations.”

Currency Stability Hinges on Capital Flows

Onay stressed that exchange rate stability is central to achieving the OVP’s macroeconomic framework.

• The TCMB has succeeded in curbing domestic demand for FX, but sustaining this will be harder given current dollar levels.

• Carry trade inflows appear to be nearing their limits, and without flexibility, additional flows are unlikely.

• Direct foreign investment (FDI) is now the most crucial source of financing, yet inflows so far in 2025 have been limited.

“In this environment, keeping the current account deficit limited is essential for currency stability. This is only possible through tight monetary policy, controlled domestic demand, and maintaining confidence in the Turkish lira,” Onay concluded.

Key Takeaways

• Growth: OVP targets of 3.3% (2025) and 3.8% (2026) broadly match Deutsche Bank’s forecasts.

• Inflation: End-2025 goal of 28.5% slightly below TCMB and Deutsche Bank projections; 2026 targets seen as too optimistic.

• Policy rates: 200 bps cut likely this week, with potential for up to 300 bps.

• Currency stability: Sustaining FX balance hinges on limiting the current account deficit and attracting FDI.

Source: Bloomberg