BBVA Research: A January Inflation Shock Is Coming for Turkey

BBVA Research has warned that Türkiye’s January inflation data could come in higher than expected, driven primarily by rising food prices, and predicted that the Central Bank of the Republic of Türkiye (CBRT) will maintain a cautious stance on interest rate cuts. In its latest assessment of Türkiye’s macroeconomic outlook and recent monetary policy decisions, the global banking group reaffirmed its year-end inflation forecast of 25% and its policy rate expectation of 32%.

The report evaluates the CBRT’s most recent interest rate decision alongside broader inflation dynamics and demand conditions, signaling that the disinflation process may face renewed pressure at the start of the year.

Food Prices Seen as Key Inflation Risk

According to BBVA Research, the CBRT’s latest rate move should be viewed as a measured, cautious step rather than the beginning of an aggressive easing cycle. The bank warned that consumer inflation in January could exceed initial forecasts, largely due to food price increases.

In its analysis, BBVA Research highlighted that food inflation remains one of the most volatile and difficult-to-manage components of Türkiye’s inflation basket. Even as some core indicators show signs of stabilization, food prices could surprise to the upside in headline inflation, especially early in the year.

The report noted that while core inflation may experience limited deterioration, the CBRT is aiming to prevent broader expectations from worsening after what was described as a relatively strong start to the year. Maintaining a tight policy stance, according to BBVA Research, remains critical to anchoring expectations and preserving credibility.

Demand Conditions Losing Disinflationary Support

BBVA Research also assessed broader economic activity, noting that by the final quarter of 2025, demand conditions were no longer providing the same level of support for the disinflation process. While earlier phases of monetary tightening helped cool domestic demand, the bank observed that this effect has begun to weaken.

The institution argued that demand has not yet fallen to levels fully consistent with the inflation target, raising concerns about the persistence of price pressures. In its words, the balance of risks has shifted toward “a more sticky inflation outlook and upward risks to economic activity.”

This assessment suggests that while growth momentum remains resilient, it may complicate the CBRT’s efforts to bring inflation down decisively. BBVA Research emphasized that managing this balance will be a central challenge for policymakers in the coming quarters.

Interest Rate Cut Viewed as Positive but Limited

The CBRT recently cut its policy rate by 100 basis points to 37%, a move that came in below some market expectations. Despite this, BBVA Research described the decision as positive, arguing that it reflected prudence rather than complacency.

However, the bank stressed that this step does not signal a clear or aggressive easing path. Instead, it should be interpreted as a carefully calibrated adjustment within a broader framework that continues to prioritize price stability.

BBVA Research noted that the CBRT appears focused on avoiding premature loosening that could reignite inflationary pressures, particularly given uncertainties around food prices, demand dynamics, and inflation expectations.

Gradual Easing Expected Through 2026

Looking ahead, BBVA Research projected that interest rate cuts will remain gradual and limited in scope. According to the report, the CBRT may restrict total rate reductions to around 100 basis points through the second half of 2026.

Under this scenario, the bank expects the policy rate to end the year at 32%, unchanged from its previous forecast. This outlook implies a prolonged period of relatively tight monetary conditions, reflecting the view that inflation risks remain elevated and require sustained policy discipline.

Inflation Forecast Held at 25%

Despite near-term risks, BBVA Research maintained its year-end inflation forecast of 25%, suggesting that while volatility may persist, the broader disinflation trend is expected to continue gradually.

The bank emphasized that achieving this outcome will depend heavily on the CBRT’s ability to maintain a firm stance, manage expectations, and respond flexibly to data surprises—particularly those stemming from food prices and domestic demand.