Macro and Politics

*The CBT will release August Real Effective Exchange Rate (REER) today @14:30 local time. Considering the inflation realizations and the average Basket/TRY change for August, we expect the REER to increase from 69.36 to 69.85, implying a 0.7% real appreciation of the Turkish lira. Should the data materialize in line with our projections, the real effective exchange rate, which has cumulatively declined by 8% in real terms since February, would record its first monthly increase following six consecutive months of depreciation.

* The CBT will release weekly foreign portfolio flows, money & banking statistics, and international reserves for the period of August 22 – 29 @ 14:30 local time. Based on our calculations using the CBT’s analytical balance sheet, we estimate that during the week of August 22 – 29, net international reserves surged by USD1.9bn to USD73.6bn, returning to pre-19 March levels, while gross FX reserves climbed by USD2bn to a new record USD178.5bn. We anticipate that today’s official reserve data will likely reflect a similar rise in line with our estimates.

* TURSTAT will release August 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 August to be approximately 2.6%. We expect a similar outcome in today’s adjusted figures.

* The CBT will release the Monthly Price Developments report for August 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.

* Monthly CPI inflation came in at 2% in August, coming in slightly above both our in-house forecast at 1.9% and the market median expectation of 1.8%. After the Istanbul Chamber of Commerce (ICC) reported a slowdown in Istanbul inflation to 1.84% in August, market participants had grown increasingly optimistic that today’s headline CPI print could undershoot expectations. Hence, despite the data coming broadly in line with both our projection and the market median estimate, it can be interpreted as pointing to a relatively more negative backdrop compared with the recent improvement in sentiment. Following the August CPI print, which came broadly in line with our expectations, we maintain our base-case scenarios for a 300bps rate cut at the September Monetary Policy Committee (MPC) meeting. That said, we are closely monitoring domestic political developments, as rising political risks and heightened volatility in TL assets could prompt the CBT to adopt a more measured easing trajectory. While we currently lack sufficient data on recent reserve dynamics, today’s and tomorrow’s analytical balance sheet releases should provide further clarity on the outlook. Accordingly, we may reassess our September rate-cut expectation if political developments or FX/reserve trends warrant a revision. While a 300bps cut remains our base case for now, we do not rule out the possibility of revising this expectation down to 200bps if downside risks intensify.