Macro and Politics

* The CBT will release the July Sectoral Inflation Expectations survey @ 10:00 local time. According to the results of the June Sectoral Inflation Expectations Survey, 12-month ahead inflation expectations declined across all surveyed groups compared to the previous month: falling by 0.5pp to 24.6% for market participants, by 1.2pp to 39.8% for the real sector and by 6.9pp to 53% for households. It should be noted, however, that the impact of the Israel–Iran conflict and its potential implications for global energy costs were not fully reflected in the June results. Therefore, the extent to which this marked improvement in inflation expectations will carry into July remains a key point of focus.

* The credit rating agencies Moody’s and Fitch released their credit rating reviews on Turkey. Moody’s upgraded Turkey’s sovereign credit rating to “Ba3” from “B1” while revising the outlook to “stable” from “positive.” Fitch, on the other hand, left both the rating and outlook unchanged, affirming the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at “BB-” with a “stable” outlook. The market consensus had anticipated no change from either agency. In line with this, we did not expect an adjustment from Fitch; however, given that Moody’s skipped its scheduled review in January, we had assessed that the agency might revise the outlook to “stable” from “positive” in light of developments over the past six months without altering the rating itself. Hence, Moody’s upgrade came as a surprise relative to both our institutional expectations and broader market forecasts.

Moody’s stated "The upgrade reflects the strengthening track record of effective policymaking, more specifically in the central bank’s adherence to monetary policy that durably eases inflationary pressures, reduces economic imbalances, and gradually restores local depositor and foreign investor confidence in the Turkish lira". The agency anticipates inflation to decelerate to approximately 30% by the end of the current year and further decline to around 20% by the conclusion of 2026. Concurrently, the agency projects economic growth at 2.2% for this year and an acceleration to 3.2% in 2026.

Fitch, on the other hand, underlined that Turkey’s ratings reflect a record of high inflation and political interference in monetary policy, low external liquidity relative to its high financing requirements, and weaker governance compared with peers. Fitch projects inflation to decline to 28% by the end of this year and further to 21% by the close of 2026. The agency expects growth to decelerate to 2.9% in 2025 before rebounding to 3.5% in 2026. Additionally, Fitch assesses the likelihood of Turkey facing U.S. tariffs as low.

Looking ahead, the next scheduled review for Turkey’s sovereign credit rating will be conducted by S&P on October 17.

*The Real Sector Confidence Index (RSCI) declined from 100.3 in July to 100.2, retreating to its lowest level since the beginning of the year, while the seasonally adjusted index increased from 98.4 to 98.9. It is worth recalling that readings below the threshold of 100 in the RSCI reflect a waning sentiment among real sector representatives regarding economic activities. Meanwhile, the Capacity Utilization Rate (CUR) slipped from 74.6% to 74.2% in July, while the seasonally adjusted CUR dropped from 74.4% to 74.1%. We anticipate that the growth, which commenced positively in 2025 supported by robust domestic demand, will shift towards a weaker footing by the second quarter. Household consumption - driven by sustained momentum in credit growth trends and the pre-March 19 interest rate cuts - delivered the strongest annual growth contribution of 1.6% in the first quarter; however, we expect its supportive effect to dwindle, albeit modestly, in the second quarter. Meanwhile, we project industrial activity to sustain its weak outlook. Although the downside risks to growth outlook have increased following tighter financial conditions domestically post-March 19, high-frequency data have yet to indicate a drastic cooling in domestic demand dynamics. On the other hand, public expenditure continues to provide a supportive backdrop for the growth outlook. Accordingly, we maintain our growth forecast at 3.1% currently.