Monitoring Turkey: Central Bank Course Unchanged

(MENAFN- ING) Turkey's economy at a glance

While slightly higher-than-expected CPI data interrupted the downward trend in October, we continue to expect annual inflation to end the year below 30%. Uncertainty around oil prices, and the knock-on effects on other commodities, continues to pose near-term risks to the inflation outlook. A sustained escalation in US-Iran tensions would add rapidly to price pressures, particularly as the sliding-scale mechanism continues to be unwound. At its last MPC meeting, the Central Bank of Turkey adjusted its guidance, placing greater emphasis on the timing and magnitude of future policy steps rather than a cautious, meeting-by-meeting approach. This suggests the easing cycle is likely to continue in December unless there is a material change in underlying conditions. In our view, October's inflation reading is unlikely to alter this course. The key risk for CBT policy will remain the Middle East conflict and a shift in the disinflation path. The bank will also continue to closely monitor demand conditions, international reserves and depositor behaviour to determine future policy actions. The inflation report released on 12 November could also provide additional evidence on the inflation developments and the scope for further monetary easing ahead. Under the 2027 borrowing plan, the Treasury expects the domestic debt rollover ratio to fall to 92% this year, well below the level initially envisaged, before rising to 100% in 2027. Total debt redemptions are projected to remain flat at around 7.2% of GDP, compared with domestic debt servicing of 6.2% of GDP, despite a continued sharp increase in interest payments, particularly on domestic debt. Preliminary customs data from the Ministry of Trade points to larger current account surpluses in September and October. This suggests that the recent pressure on CBT reserves has largely reflected foreign outflows. In the months ahead, the current account trajectory is expected to be influenced by a mix of external risks and domestic demand conditions. Meanwhile, after declining in September and October amid weaker confidence and the closure of certain investment funds, CBT reserves rebounded strongly in early November. The central government budget registered a deficit of around 3.0% of GDP on a 12-month rolling basis as of September, narrower than the 3.9% deficit recorded in the same month of the previous year. The primary balance, which recovered from a deficit of 0.4% of GDP in the same period last year to a 0.3% surplus, also points to an improvement on the fiscal front.

Quarterly forecasts Source: Various sources, ING

"> FX and rates outlook

The market was not significantly shaken by October's higher-than-expected inflation. In the global rally, TRY OIS rates have tested new lows, with the 1-year tenor reaching 35%, a level not seen since before the onset of the US-Iran conflict. The market has fully priced in a 100bp rate cut by the CBT in December, and has additionally factored in two further 100bp cuts for the first half of next year. However, these are expected to be quickly reversed, with rates projected to be higher by the end of next year. Despite the ongoing rally in TRY rates, we see further room for them to move lower and for the market to price in additional CBT rate cuts, particularly for next year. While the inflation outlook is admittedly challenging, the CBT has repeatedly demonstrated a dovish bias. This, combined with a further decline in inflation in 1Q27, should help the central bank to convince the market. Consequently, we see scope for further steepening of the curve.

In FX, we expect the current managed depreciation regime to remain in place, with no further increase in the pace of lira weakness unless there is a significant external shock. FX stability remains a key anchor for disinflation and demand for TRY assets, while the central bank is also seeking to limit excessive real appreciation. Reserve dynamics and resident dollarisation will remain key for the policy outlook. With the return advantage of lira deposits over FX narrowing, any renewed dollarisation could constrain further rate cuts or prompt the central bank to pause. For now, however, resident FX demand remains contained, allowing gradual monetary easing to continue while maintaining sufficient carry to compensate investors for ongoing currency depreciation. Foreign investor positioning rebounded after the initial US-Iran conflict shock, with FX swaps now at highs above pre-war levels. However, year-to-date, bond inflows remain modest. We expect USD/TRY to reach 52.00 by the end of this year and 63.00 by the end of 2027.

CBT reserves (US$ bn) Source: CBT, ING

"> Sovereign credit views

Turkey has held up well despite the global macro volatility in recent months and local investment fund noise. We continue to see fundamentals as relatively stable against a backdrop of higher energy prices and global bond yields. In this context, Turkey's dollar bonds continue to offer a decent pickup of 30-40bp over BB peers, despite some tightening in recent weeks. We expect investor demand to remain robust, supported by the solid local bid, while external issuance should be steady with $13bn planned for next year at the sovereign level.

US$ Bond Sub-Index Spreads vs USTs Source: Refinitiv, ING

"> The Treasury's borrowing plan for 2027

The Treasury expects the domestic debt rollover ratio to reach 92% this year, well below the 106% initially envisaged, before rising to 100% in 2027. The borrowing programme also projects debt redemptions to remain broadly stable at around 7.2% of GDP next year, compared with domestic debt servicing of 6.2% of GDP, despite a continued sharp rise in interest payments, especially on domestic debt.

Of the TRY6,761bn in domestic debt redemptions due in 2027, TRY5,856bn will be market-based, with the remaining TRY905bn owed to public institutions through non-competitive sales. Assuming borrowing from public institutions is fully rolled over, in line with the Treasury's usual assumption, around TRY5,857bn of the planned TRY6,762bn in domestic borrowing could be raised through the market, equivalent to 5.3% of GDP.

Last year, the Treasury announced that it would borrow US$13bn in 2026, and has secured US$12.2bn, so far. According to the Treasury's own projections, it will repay US$4.8bn in the last quarter of 2026 and US$20.1bn (US$12.7bn of this amount is principal) in 2027. Despite the heavy schedule, it plans to raise issuance to US$13bn next year, while the CBT's strong reserve position should provide some support.

Despite high external funding plans, domestic borrowing requirements seem to be elevated, given high budget deficits in recent years and a high interest rate environment. The rate outlook and sustained foreign investor appetite will be key, particularly given the CBT's commitment to maintaining a tight monetary stance even as the easing cycle progresses.

Details of the programme Source: Ministry of Treasury and Finance, ING

"> Inflation edges higher as downtrend stalls

Monthly inflation came in at 2.58% in October, slightly above the market consensus and our 2.4% forecast, driven by unprocessed food, energy and clothing. Annual inflation edged up to 29.77%, from 29.73% a month earlier and above the CBT's forecast of 28%, reflecting volatile and seasonal factors. In our view, however, the increase is unlikely to cause significant concern for the central bank. Core inflation (CPI-C) rose by 2.1% month-on-month, below the level recorded last year, leading to a drop in the annual rate to 28.3%. Meanwhile, the CBT's management of the currency continued to support disinflation through the cost channel. The lira depreciated by a modest 1.7% on average in October and 18.4% year-on-year, significantly less than inflation over the same period, helping to contain imported price pressures.

In the breakdown, food and clothing made the largest contributions to the headline rate (with 0.84ppt and 0.82ppt, respectively). Benign processed food, which recorded a pronounced slowdown in comparison to the same month last year, limited the adverse seasonal effects from processed food. Clothing, on the other hand, spiked on the back of seasonality, though remained close to the last four-year average. The transportation group followed with a 0.36ppt contribution to the headline rate, driven by higher energy prices and the gradual unwinding of the special consumption tax (SCT) on fuel products.

Inflation expectations and CBT forecast (12m-ahead, YoY%) Source: TurkStat, CBT, ING

"> The CBT resumed rate cuts and signalled more to come

In October, the CBT resumed policy rate cuts (1-week repo rate) after a long pause since January, reducing the rate by 100bp to 36%, while keeping the width of the interest corridor unchanged at 450bp. The move, in line with expectations, reflected its assessment of the September inflation outturn and softer economic activity, despite Brent oil trading at around US$110 per barrel at the time of the decision amid risks stemming from Middle East geopolitics.

Regarding forward guidance, the central bank had previously emphasised that monetary policy decisions would be taken with a cautious, meeting-by-meeting approach focused on the inflation outlook. In this month's forward guidance, however, it altered its wording and shifted this emphasis to the magnitude and timing of future policy steps. This change implies that, unless there is a material shift in the conditions that have prompted the easing cycle, the Bank is likely to continue its rate-cutting process in December as well.

The policy rate vs. interbank O/N rate Source: CBT, Bloomberg, ING

"> Downside growth risks are on the rise

Hard data for the third quarter indicates that activity likely moderated, with industrial growth remaining weak despite resilient services and a recovery in construction. While early indicators for September pointed to some improvement, including gradual increases in capacity utilisation and real sector confidence, October indicators suggest that activity will remain subdued in the final quarter of 2026. The PMI remains weak, real sector confidence has reversed direction and services confidence has fallen back to May levels.

Consumption indicators also point to some loss of momentum amid restrictive financial conditions and macroprudential measures, despite the CBT lowering its funding cost from 40% to 36% since late August. Slower consumer card spending and consumer loan growth, excluding mortgages, are also weighing on domestic demand. In addition, consumer confidence fell sharply from 91.92 in September to 84.82 in October, its second-largest monthly decline since 2004.

Overall, the economy remains on a moderating growth path in the second half of the year. The recent disruption to investment funds is likely to put further pressure on domestic demand, increasing the downside risks to our full-year GDP growth forecast of 2.8%.

Real GDP (%YoY) and contributions (ppt) Source: TurkStat, ING

"> PMI moves further into contractionary territory

The manufacturing sector PMI (seasonally-adjusted basis) moved down to 47.3 in October from 47.9 in September. This likely implies more pronounced momentum loss in the manufacturing sector. The weakening in the PMI is attributable to i) a slowdown in new orders on the back of challenging market conditions; ii) lengthening of suppliers' delivery times attributable to growing sea transportation challenges amid ongoing geopolitical risks and; iii) continuing pricing pressures due to higher energy prices as well as rising raw material costs. Accordingly, manufacturers scaled back their output at a faster pace to limit inventory build-up.

Findings from the sectoral PMIs, on the other hand, confirmed the picture of continued input price pressures. Six of the ten sectors recorded declines in their PMIs, while food was again the standout among those recording increases, remaining above the 50 threshold.

PMI & Industrial Production Source: ICI, TurkStat, ING

"> Current account surplus narrowed in August

The current account recorded a surplus of US$4.1bn in August, slightly higher than the market forecast of US$3.8bn. Compared with August 2025, the surplus fell from US$4.6bn to US$4.1bn. This was mainly due to the goods deficit widening from US$2.8bn to US$3.7bn. Although the services surplus increased from US$9.3bn to US$9.7bn, it was not enough to fully offset the weaker trade balance. The primary and secondary income accounts showed little change. Based on developments so far, including higher energy prices linked to regional conflicts, we expect the current account deficit to widen from 1.9% of GDP in 2025 to 2.4% in 2026, with risks pointing to a larger deficit.

The capital account weakened compared with the previous month, posting net outflows of US$1.4bn. However, US$4.5bn in inflows through net errors and omissions, together with the current account surplus, helped lift official reserves by US$7.1bn in August.

Current account (12M rolling, US$bn) Source: CBT, ING

"> Budget deficit below target, despite rise in September

In September, central government tax revenues increased by 21.8% year-on-year, with growth restrained by weaker direct tax collections and a decline in Special Consumption Tax (SCT) revenues. Among indirect taxes, Value Added Tax (VAT) revenues rose by 34.8% YoY, while SCT revenues declined due to lower fuel-related collections. On the expenditure side, non-interest spending moderated, largely reflecting slower growth in personnel expenditure. Excluding interest payments, expenditure increased by 32.1% YoY, marking a partial deceleration, largely driven by a loss of momentum in personnel spending.

In September, the overall budget balance posted a deficit of TRY 532.2bn, exceeding the TRY 309.6bn deficit recorded in the same month of the previous year. As a result, the rolling 12-month budget deficit rose to TRY 2,422bn. As of end-September, the ratio of the rolling 12-month budget deficit to GDP stood at 3.0%, remaining below even the revised Medium-Term Programme (MTP) forecast of 3.1% (revised down from 3.5%). This is a positive development.

Budget performance Source: Ministry of Treasury and Finance, ING

"> Unemployment rate returned to 8-9% range in September

According to the seasonally adjusted data, the number of unemployed people rose by 198K in September from the previous month, reaching 2.97mn. The unemployment rate moved up by 0.5ppt on a monthly basis to 8.4%. It has remained broadly stable in the 8-9% range since mid-2024, occasionally falling below 8%, which was the case in August. Meanwhile, the labour force participation rate stood at 52.7%, recording a slight increase vs August. The data showed that the rise in headline unemployment rate was attributable to the drop in both employment and the labour force.

Broader measures of unemployment also pointed to a deterioration compared with the previous month. The inactive labour force rate, which comprises time-related underemployment, the potential labour force, and unemployed persons, grew by 0.2ppt to 31.2%. Although this indicator typically exhibits a volatile pattern, it has been in an upward trend in recent years.

Labour market outlook Source: TurkStat, ING

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