Macro and Politics

*The CBT will release May Real Effective Exchange Rate (REER) today @14:30 local time. Considering the inflation data and the average Basket/TRY change for May, we expect the REER to ease from 72.12 to 71.77, implying a 0.5% real depreciation of the Turkish lira. In case the REER declines by 0.5% in May, in line with our calculations, the Turkish lira’s cumulative real depreciation over the past three months would amount to 4.5%.

* TURSTAT will release May seasonally adjusted CPI and special CPI aggregates today @16:00 local time. Based on our calculations, we forecast the seasonally adjusted monthly CPI change for May to be approximately 1.7%. We expect a similar outcome in today’s adjusted figures.

* The CBT will release the Monthly Price Developments report for May today @18:00 local time. The report is a technical one and does not contain a policy message. Still, the assessment of trend core inflation will be monitored closely.

* The CPI rose by a mere 1.53% m/m in May, below both our in-house estimate and the market consensus of 2.1%. On an annual basis, CPI inflation slid from 37.9% to 35.4%. We would like to emphasize that the deviation between our forecast and the actual print largely stems from this unexpected downside in food prices. Our year-end inflation forecast for 2025 stands at 31%. The average of core inflation metrics Core – B and Core – C on a monthly basis corresponds to an annualized rate of 32.1%, which is broadly consistent with and supportive of our institutional projection. It’s worth noting that, despite lower-than-expected May CPI outcomes, we still do not expect a rate cut in June as the primary driver of the current tight policy stance has not been inflation alone, yet the likelihood of a rate cut in July has risen notably. While our baseline scenario has remained a cut in September, we have consistently highlighted that a July move cannot be ruled out. Considering the ongoing recovery in reserves, the five-week decline in resident FX deposits, and continued foreign inflows through standard portfolio channels, we now believe the likelihood of a rate cut in July has increased. Ahead of such a move, we would expect to see clearer signals in June. Therefore, although we do not anticipate a policy rate cut at the June MPC meeting, we will be watching for potential signals such as a possible adjustment of the upper band to 47.5%, which would restore symmetry to the interest rate corridor, and/or a neutralization of the hawkish tone in the accompanying statement.