BBVA Research Sees Room for January Rate Cut as Turkey’s Inflation Surprise Eases Pressure

Global financial heavyweight BBVA Research has turned its focus to Turkey’s December inflation data, concluding that the softer-than-expected figures, combined with supportive tax policies, could pave the way for an interest rate cut by the Central Bank of the Republic of Turkey (CBRT) in January. While the outlook has improved, the bank also cautioned that inflation persistence—particularly in services—remains a key risk that policymakers cannot ignore.

Following the release of December data by the Turkish Statistical Institute (TURKSTAT), expectations of an imminent rate cut gained traction across financial markets. In its latest assessment, BBVA Research noted that conditions have emerged for a 150 basis point reduction at the January Monetary Policy Committee (MPC) meeting, provided inflation dynamics remain broadly under control.

Softer Headline Inflation Brings a Positive Surprise

According to BBVA Research, headline inflation in December rose by less than 1% on a monthly basis, a result that came in below market expectations and was described as a positive surprise. The report highlighted two main drivers behind this outcome: declining global energy prices and seasonally weak core inflation components, which helped suppress short-term price pressures.

This combination eased immediate inflation concerns and improved the short-term outlook for monetary policy. The bank emphasized that energy-related disinflation played a meaningful role in shaping the December figures, offering temporary relief to headline indicators.

Tax Policy Plays a Supportive Role

BBVA Research also drew attention to the government’s approach to administered and tax-driven prices, noting that policy coordination has become increasingly important in anchoring inflation expectations. According to the report, keeping tax increases on products such as fuel, alcohol, and tobacco aligned with the upper band of the CBRT’s inflation targets in the first half of 2026 could help offset inflationary pressures stemming from wage adjustments.

Citing reporting by Dünya Gazetesi, the analysis suggested that this controlled stance on administered prices may neutralize part of the inflationary impact of minimum wage hikes, which are traditionally a key driver of services inflation. BBVA stressed that such coordination between fiscal and monetary authorities is critical for maintaining credibility in the disinflation process.

Managed Prices Seen as Key to Anchoring Expectations

The report underlined that discipline in managed prices is likely to play a crucial role in shaping market expectations. BBVA Research argued that predictable and restrained tax adjustments can prevent second-round effects, particularly in sectors where price-setting behavior is sensitive to expectations rather than immediate costs.

By limiting sudden shocks in administered prices, policymakers may strengthen confidence that inflation is on a sustainable downward path, even if headline figures fluctuate in the short term.

Core Inflation and the Risk of Persistence

Despite the improvement in headline data, BBVA Research warned against excessive optimism. The report highlighted ongoing risks linked to core inflation dynamics, particularly within food and services categories. According to the bank’s seasonally adjusted calculations, monthly CPI inflation stood closer to 1.6%, well above the headline reading.

This discrepancy underscores what economists often describe as inflation “stickiness”, where underlying price pressures remain elevated even as headline figures temporarily improve. BBVA pointed out that core B and C inflation indices hovering around 2% on a monthly basis signal that the disinflation process is far from complete.

Food prices and services inflation continue to display rigidity, suggesting that demand-side pressures and cost pass-through effects remain active in the economy.

A Cautious Path Toward Rate Cuts

BBVA Research maintained that the December inflation outcome strengthens the CBRT’s hand, especially if similar trends persist and no extreme shocks emerge in food prices. However, the bank stressed that any easing cycle must be approached with caution.

Summarizing its view, BBVA Research stated in English translation:
“The December inflation data and supportive tax adjustments open room for a 150 basis point cut in the policy rate in January. However, inflation expectations remain above the CBRT’s projected 16–19% range for end-2026, making a cautious policy path essential.”

BBVA Research’s 2026 Macro Outlook for Turkey

The report also included updated macroeconomic projections for 2026, comparing BBVA Research’s expectations with official central bank targets.

BBVA forecasts end-2026 inflation at 25%, notably above the CBRT’s upper target band of 19%, highlighting lingering uncertainty around the speed of disinflation. The bank identified services inflation and minimum wage adjustments as the most critical risk factors that could slow progress.

At the same time, BBVA reiterated its expectation of a 150 basis point policy rate cut in January, assuming that inflation data remains broadly favorable and fiscal discipline is maintained.

Markets Watch January Closely

Taken together, BBVA Research’s analysis paints a nuanced picture. December’s inflation surprise has clearly improved the short-term monetary policy outlook, increasing the likelihood of a rate cut at the start of the year. Yet, underlying price pressures—particularly in services—mean that monetary easing is likely to be gradual rather than aggressive.