Macro and Politics

* The CBT will release the August Sectoral Inflation Expectations survey @ 10:00 local time. According to the results of the July Sectoral Inflation Expectations Survey, 12 month ahead inflation expectations fell by 1.2pp to 23.4% for market participants and by 0.8pp to 39% for the real sector, while rising by 1.5pp to 54.5% for households. We estimate that the escalation of tensions and the outbreak of war between Israel and Iran have filtered through to July survey results, exerting upward pressure on household inflation expectations during the period. Our year-end inflation forecast stands at 31%, though we assess that CPI could close the year slightly below this projection, in the 29.5–30% range. Looking 12-month ahead, our headline CPI forecast stands at 25.1%.

* The Treasury and Finance Ministry will release July central government budget figures @ 11:00 local time. In July, the Treasury recorded a cash deficit of TL68.5bn, while the primary balance posted a surplus of TL54.6bn. Cash budget figures are indicative for today’s central government budget data. We forecast the 2025 budget deficit at TL1.9tn, corresponding to 3% of GDP, with upside risks attached.

* The CBT unveiled the 3^rd Quarterly Inflation Report of the year, and the Governor Karahan stated that they have decided to revise the framework for medium-term inflation forecasts. Under the new approach, in addition to the Inflation Report projections, interim year-end–oriented targets will be announced to serve as commitments and anchors. These interim targets will remain unchanged unless extraordinary developments in inflation occur. Under this revised policy framework, inflation is projected to register within a range of 25% to 29% by end-2025, and 13% to 19% by end-2026. Interim targets have been set at 24%, 16%, and 9% for 2025, 2026, and 2027, respectively. Governor Karahan underlined that, starting with this meeting, forecasts and interim targets would be delineated separately. He further stressed that, barring extraordinary developments in inflation, the interim targets will remain unchanged. Although our August CPI calculation has not yet been finalized, we so far estimate a monthly CPI of approximately 1.9% for the month. A realization in line with our estimate would reduce the annual CPI from 33.5% to 32.8%. Barring any unforeseen shocks, we anticipate that the CBT will continue to cut the policy rate by 300 bps in September, subsequently moderating the pace to 200 bps in October and December meetings, ultimately bringing the policy rate down to 36% by year-end.

*During the week of 1–8 August, foreigners registered a limited net inflow of USD78mn into the equity market, while recording USD417mn in net sales in the bond market (excluding repo transactions). Meanwhile, their share in the total bond stock stood at 6.4% during the same week. Moreover, the residents’ total FX deposits (including gold, price adjusted) surged by USD1.5bn during the week of 1 – 8 August. As per the CBT’s reserves, gross FX reserves climbed by USD5.4bn to USD174.5bn and net international reserves rose by USD4.4bn to USD67.5bn, while net reserves excluding swaps increased by USD5.9bn to USD49.7bn.