HSBC: Turkey’s Policy Rate Seen Falling to 25.5% by End-2026

HSBC’s latest macroeconomic assessment projects that the Central Bank of the Republic of Turkey (CBRT) will maintain its current monetary easing cycle, forecasting an additional 150-basis-point rate cut in December and a policy rate of 25.5% by the end of 2026. The report argues that Turkey’s economy proved remarkably resilient throughout 2025, despite simultaneous domestic and external shocks.

While domestic developments triggered more pronounced market fluctuations, HSBC notes that the broader macro framework remained stable, aided by policy continuity and gradual normalization within financial markets.

Growth Seen at 3.5% in 2026—But With Disinflation Trade-Offs

HSBC expects Turkey’s GDP to expand by around 3.5% in 2026, with policymakers aiming to stabilize growth in the 3–4% range.
This strategy, while supportive of economic momentum, is also expected to slow the pace of disinflation.

The bank underscores a significant policy dilemma: maintaining growth near potential could limit the severity of the slowdown, but it may also prevent inflation from falling as quickly as targeted.

Inflation Expected to Ease, but More Slowly Than Desired

According to the report, headline inflation—around 32% at the end of 2025—is expected to fall to 20% by end-2026.
However, HSBC stresses that several forces may restrain the speed of this decline:

• Persistent domestic demand,

• High inflation expectations,

• Limited appreciation in the Turkish lira,

• Sticky service and wage-driven price components.

The bank also emphasizes that CBRT’s official forecast for end-2026 remains within a 13–19% range, with a midpoint of 16%, meaning HSBC’s projection is notably more cautious.

Rate Cuts Expected to Continue Throughout 2026

HSBC sees the Monetary Policy Committee extending its easing path, supported by an improving macro backdrop, lower imported inflation, and stabilization in domestic financing conditions.
The bank expects:

• 150 bps cut in December,

• A steady decline through 2026,

• Policy rate reaching 25.5% by year-end.

This forecast signals confidence that inflation pressures will moderate enough to permit further rate reductions—though not at an aggressive pace.

Currency Policy: A Year of Uncertainty Ahead

The report highlights ongoing ambiguity around FX management in 2026.
The CPI-based real effective exchange rate (REER) rose 31% between June 2023 and December 2024, reflecting substantial genuine appreciation. In contrast, the REER remained flat throughout 2025, pointing to a more cautious and controlled currency environment.

HSBC expects only limited genuine appreciation in 2026, suggesting that policymakers will prioritize stability over aggressive lira strengthening.

Political Uncertainty Remains a Key Risk

Political developments remain one of the primary risk factors cited by HSBC. Despite this, the report notes that markets have responded positively to the fact that Turkey’s economic stabilization program, now in its third year, has not deviated from its core direction.

The bank describes the macro environment as one featuring:

• A managed soft landing,

• Reduced financial vulnerabilities,

• Phaseout of distortionary policy measures,

• And a gradual normalization of the monetary-fiscal mix.

Still, HSBC stresses that price stability has not yet been achieved, and that anchoring expectations remains a central challenge.

Fiscal Outlook: Budget Deficit Narrows, but No Sharp Tightening in 2026

The report highlights improvements in Turkey’s budget performance. The 12-month cumulative deficit, which had reached 4.7% of GDP, declined to 3.9% as of October.
However, HSBC notes that the medium-term program does not indicate meaningful fiscal tightening in 2026.

While long-term fiscal consolidation and supply-side reforms are viewed as highly desirable, the bank expects these initiatives to remain secondary for now as policymakers prioritize growth stability and controlled disinflation.

Overall Outlook: Stability With Managed Easing

HSBC’s report paints a picture of an economy navigating a delicate balancing act:

• Slower, controlled disinflation,

• Gradual rate cuts,

• Moderate growth,

• Fiscal improvements without aggressive tightening,

• Ongoing political and FX-related risks.