Macro and Politics

*The Treasury will hold 4y TLREF-indexed and 9y fixed coupon bond auction today and finalize its domestic borrowing program for June. The Treasury tapped the domestic markets to the tune of T60.8bn (including non-competitive sales) via yesterday’s 2y fixed coupon and 4y CPI-indexed bond auctions. As a result, the Treasury’s total domestic borrowing so far this month has reached TL158.6bn. According to three-month (June – August 2025) domestic borrowing program, the Treasury has a domestic redemption of TL265.6bn in June, while in return it plans to borrow TL279bn in total throughout the month. Having already raised TL158.6bn through domestic borrowing this month, the Treasury is likely to borrow around TL120bn via today’s double auctions.

*The central government budget posted a surplus of TL235.2bn in May, broadly in line with our house estimate, while the primary balance registered a surplus of TL346.bn. As a result, the cumulative budget deficit for the first five months of the year stood at TL50.3bn, corresponding to 33.7% of the TL1.93tn deficit target set for 2025. As of May, the 12-month rolling budget deficit reached TL2.3tn, while the 12-month rolling primary deficit stood at TL653.bn. It is worth noting that the sizeable surplus recorded in May was largely driven by a surge in corporate tax revenues, stemming from the structural impact of the removal of the fourth corporate provisional tax payment, which was abolished starting in May 2023. The removal of this instalment has led to a concentration of corporate tax declarations in May, reflecting both the first-quarter provisional taxes for the current year and corporate taxes announced for the previous year’s last quarter. However, we anticipate this temporary revenue boost to disappear in June, with the budget balance returning to deficit territory in the subsequent month. We forecast the 2025 budget deficit at TL1.9tn, corresponding to 3% of GDP.

*The current account posted a deficit of USD7.86bn in April, slightly exceeding our house forecast of USD7.5bn. Consequently, the 12-month trailing current account deficit widened from USD12.8bn to USD15.8bn. The core balance, which excludes gold and energy, also recorded a USD1.9bn deficit in the same period, marking the first negative print since April 2024. Accordingly, the 12-month cumulative surplus in the core balance narrowed from USD51.4bn to USD49.5bn. Based on preliminary foreign trade data, we expect the current account to register a modest deficit of around USD200mn in May. Our year-end forecast for the 2025 current account deficit stands at USD22bn (1.5% of GDP).

* The CBT released the results of the June Market Participants’ Expectations Survey. Accordingly, the year-end inflation expectation, which had previously edged up from 30% to 30.35% in May, declined to 29.86% in the June survey—marking the first downward revision since March. In addition, the 12-month-ahead CPI forecast dropped from 25.06% to 24.56%, while the 24-month-ahead expectation decreased from 17.77% to 17.35%. Moreover, participants’ monthly inflation forecast for June currently stands at 1.61%. Based on our compiled average price data so far, we estimate that monthly CPI inflation in June may come in within the 1.7% - 1.8% range. We maintain our year-end inflation forecast at 31%, though we now see the risks as skewed marginally to the downside. While no change is expected at this week’s Monetary Policy Committee (MPC) meeting, expectations have shifted toward a 300bps rate cut in July. We expect the MPC to keep the policy rate unchanged at 46% at this week’s meeting, while lowering the upper bound of the interest rate corridor (the overnight lending rate) from 49% to 47.5%. Should June inflation align with our projection and materialize within (or below) the 1.7% - 1.8% band, we believe the CBT may initiate a series of 250bps cuts starting in July, bringing the policy rate down to 36% by year-end.