Turkey’s Disinflation Path Shows Progress, But Risks and Market Volatility Remain

Turkey’s inflation battle is showing signs of success, with consumer prices easing faster than expected in May. However, global uncertainties, capital volatility, and political friction continue to cloud the Central Bank’s path forward. While Ankara targets single-digit inflation by 2027, analysts remain divided on whether rate cuts are imminent.

Inflation Falls Sharply, Raising Speculation Over Rate Cuts

Turkey’s annual inflation fell to 35.41% in May, its lowest since 2021 and well below expectations, reviving speculation that the Central Bank of the Republic of Türkiye (CBRT) may resume rate cuts as early as June.

The monthly inflation figure also dropped to 1.53%, down from 3% in April, driven by a surprising decline in food prices. These developments sparked optimism in financial markets, boosting banking stocks and easing pressure on the lira.

Economists at ING and Capital Economics noted that the decline reflects both strong base effects and tight monetary policy, while emphasizing that market volatility remains under control.

Central Bank Cautious Despite Easing Trend

The CBRT, which raised its key interest rate to 46% in April, signaled readiness to tighten again if necessary. Its next monetary policy meeting is set for June 19, with another due on July 24.

While Capital Economics and BBVA Research see room for an early rate cut, Morgan Stanley and ING predict the bank will remain on hold until July or later. A shift back to one-week repo auctions could signal an easing bias, especially if funding costs align with the policy rate.

Turkey’s year-end inflation target remains 24%, with an upper bound of 29%. Market forecasts remain slightly higher at around 30%, but estimates have recently been revised downward.

OECD: Policy Measures Are Working—But Must Be Sustained

OECD Chief Economist Álvaro Pereira praised Turkey’s disinflation progress, calling the policy mix “effective” and urging Ankara to stay the course.

“Bringing down inflation must remain the top priority,” Pereira told Anadolu Agency, projecting inflation to average 30% in 2025 and 18.5% in 2026.

The OECD also expects Turkey’s budget deficit to fall from 4.9% of GDP in 2024 to 3.0% by 2026, citing improved revenues and falling capital expenditures.

Fiscal Strength Still a Key Asset

Despite persistent inflation, Turkey has maintained strong public finances. With public debt below 40% of GDP, it fares far better than many advanced economies such as France, Italy, or Japan. Even after the 2023 earthquake-driven spending surge, the budget deficit remained contained at roughly 5% of GDP.

This fiscal discipline is critical for investor confidence. Pereira emphasized that macroeconomic stability, reduced red tape, and an improved regulatory environment would help attract foreign direct investment (FDI) and boost tourism revenues.

Long-Term Inflation Target: 8.5% by 2027

According to Turkey’s medium-term disinflation plan, the government aims to lower inflation to 41.5% by end-2025, 17.5% in 2026, and 8.5% in 2027. However, geopolitical risks, global trade fragmentation, and domestic political tensions could hinder that trajectory.

Still, OECD analysts remain cautiously optimistic, urging Ankara to maintain policy consistency and avoid premature easing.

Lira Stabilizes, Reserves Rebound

After weakening sharply in March following the arrest of Istanbul Mayor Ekrem Imamoğlu, the Turkish lira has since stabilized, buoyed by lower inflation and rising reserves. Foreign exchange reserves rose from $138.5 billion in early May to $153.1 billion, helping to support the currency.

The lira has still lost 9.6% year-to-date against the dollar but held steady around 39.14 following the inflation report.

External Trade Risks: U.S. Tariffs a Limited Threat

While the OECD warned that escalating U.S. tariffs could dampen global growth, Pereira said the impact on Turkey would likely be modest. Still, he emphasized the importance of negotiating reduced trade barriers with the U.S. to unlock Turkey’s export potential and attract more American investment.

Conclusion: A Delicate Balance Ahead

Turkey’s economic authorities have made real progress in curbing inflation, supported by disciplined fiscal policy and cautious monetary tightening. But with growth still fragile, the road to stability remains bumpy. The upcoming CBRT decision and global trade dynamics will be key to determining whether Turkey can safely shift to an easing cycle without reigniting inflation.

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