The Central Bank of Turkey's (CBT’s) latest monthly survey revealed a worsening picture of inflation expectations, with market participants now anticipating an end-2025 inflation rate of 31.8%. This is up from 29.9% in the previous month's survey and exceeds the CBT's upper forecast bound of 29.0%. At the same time, Minister Mehmet Simsek remarked to the media during a US visit that he expects inflation to end the year at around 30%, Commerzbank's FX analyst Tatha Ghose notes.

Turkey’s inflation expectations surge beyond CBT forecast range

"Policymakers blame frost and other one-off factors for creating inflation via food prices. Yet, the situation is so identical to frequent past episodes when Turkish policy makers revise inflation forecasts upward as the horizon draws near. Medium-term forecasts will continue to portray gradual moderation towards target, whether or not there is any _realistic_ framework to make this happen. Realistic in the sense that something obviously failed last time – do we have a genuine explanation followed by re-calibration of monetary policy that would be necessary for this not to be repeated? Typically, the answer to this question is 'no'."

"As per the latest survey, longer-term expectations have also drifted higher, with the 12-month ahead estimate rising to 23.3% and the 24-month forecast reaching 17.4%. In here, we see that familiar profile according to which inflation will be automatically slower in the medium-term. Then as each timeframe draws near, those forecasts will gradually edge upwards. Despite these mounting inflationary pressures, the survey indicates that market participants expect CBT to continue cutting interest rates, to 39.0% this week and to 37.7% by December."

"The lira's depreciation, running at an annualised rate of 40% against a basket of USD and EUR, further exacerbates inflationary pressures. CBT's rate cuts are now motivated by a perceived lack of alternatives, as the economic policy team probably sense that President Tayyip Erdogan's patience with conventional policy will run out if rates had to be kept high any longer. Therefore, CBT will likely appeal to secondary policy tools in case inflation were to re-accelerate. Consequently, the fundamentals of the lira exchange rate are not improving, and the currency could face increased volatility."