ING: High Inflation and Politics Complicate Turkey’s Central Bank Decisions

According to a new ING research report, the combination of higher-than-expected August inflation and recent political and institutional developments could complicate the Central Bank of the Republic of Turkey’s (CBRT/TCMB) decision-making process.

The report highlights that while rate cuts remain on the agenda, volatility and political uncertainty will weigh heavily on how quickly and how far monetary easing proceeds.

“Volatility control will play a critical role in determining the size of the rate cut, although so far it has remained fairly limited,” ING noted.

Interest Rate Forecasts: From 43% to 37% by Year-End

ING expects the CBRT to cut its policy rate by 200 basis points this week, lowering it to 41%. A further cut is anticipated in December, bringing the rate down to 37% by year-end.

Despite these expectations, ING stressed that Turkey’s real interest rates will remain high in the short term, given inflation’s persistence.

Inflation Outlook Revised

The bank revised its year-end 2025 inflation forecast slightly upward, from 29.5% to 30%, underscoring the ongoing difficulties in controlling consumer prices.

“According to our policy rate forecast, this means that high real interest rates will continue in the near term,” the report stated.

The August data, which exceeded market expectations, confirmed the challenges of Turkey’s disinflation path, even after months of tight monetary policy.

Stronger Growth Expectations

Despite inflationary pressures, ING pointed to the resilience of domestic demand, prompting an upgrade in its growth outlook.

• 2025 GDP forecast: Raised from 2.7% to 3.3%

• 2026 GDP forecast: Increased from 3.5% to 4.0%

The bank argued that Turkey’s economy continues to show structural momentum, supported by consumption and investment activity.

Currency Forecasts: Lira’s Long-Term Real Gains

The report also updated USD/TRY forecasts, projecting the lira to weaken in nominal terms but gain in real value over time:

• End-2025 USD/TRY forecast: 45.00

• End-2026 USD/TRY forecast: 53.00

On the exchange rate front, ING explained:
“The Central Bank considers the lira’s real appreciation as a natural outcome of its tight monetary policy stance, which has increased demand for the currency. While we may not see steady appreciation on a monthly or quarterly basis, cumulative real gains for the lira over the longer term are highly likely.”

Balancing Act for the Central Bank

The CBRT faces a delicate balancing act:

• Easing monetary policy to support growth.

• Maintaining credibility in its disinflation program.

• Navigating political pressures while preserving financial stability.

Analysts note that while strong reserves and tighter monetary conditions provide some breathing room, both inflation and political uncertainty will test the CBRT’s resolve in the months ahead.