Macro and Politics

* The CBT Governor Karahan spoke before the Parliamentary Planning and Budget Commission yesterday, noting that annual consumer inflation rose in September, driven primarily by food and services prices. Karahan highlighted that the underlying trend in median inflation — which has demonstrated relatively better forecasting performance — currently implies a rate around 26%. Although this stands below the current CPI level of 33.3%, it nevertheless suggests that the pace of disinflation has slowed. He emphasized that domestic demand continues to moderate and remains at a level consistent with disinflation. While acknowledging that the disinflation process, which has been ongoing since June 2024, has lost some momentum, Karahan underlined the Bank’s determination to ensure that inflation evolves in line with interim targets through appropriate policy steps. Reiterating that the tight monetary stance will be maintained until price stability is achieved, Karahan also stated that the monetary policy stance will be tightened in case of a significant deviation in inflation outlook from the interim targets. Following the higher-than-expected September CPI print, we expect the CBT to proceed with rate cuts at a more cautious pace. We foresee two 150bps rate cuts in October and December, which would bring the year-end policy rate to around 37.5%.

* The Treasury tapped the domestic markets to the tune of TL42.1bn via yesterday’s 5y fixed coupon bond auction, while also sold TL38.4bn at the direct sale of 2y TLREFK (Turkish Lira Overnight Participation Reference Rate) indexed lease certificate. The bid – to – cover ratio for 5y fixed coupon bond auction was high at 2.26x, while average cost of borrowing was 36.98%. Accordingly, the total domestic borrowing since the beginning of the month reached TL123bn. According to the three-month (October–December 2025) domestic borrowing strategy, the Treasury plans to borrow a total of TL290.1bn through five auctions and one direct sale, against redemptions of TL263.6bn in October. After this week’s auctions, the Treasury will hold a 5-year CPI-indexed bond auction on October 13, and 2-year & 10-year fixed-coupon bond auctions October 14 and finalize its domestic borrowing program for October.

* The Treasury cash budget posted a deficit of TL359.9bn in September, while the primary budget recorded a deficit of TL 133.1bn.  In Jan – Sep period, the cash deficit reached TL1.6tn, with the primary deficit standing at TL100bn. September cash budget figures are indicative for central government budget figures to be released on October 15th. Hence, taking into account the divergence between the cash-based and accrual-based budget figures, we expect the central government budget to record a deficit of around TL275bn in September. Please note that we have recently revised our year-end 2025 budget deficit forecast upward from TL1.9tn (3.1% of GDP) to TL2.3tn (3.7% of GDP). Recall that the Medium-Term Economic Program (MTEP) for 2026–2028, released last week, revised the 2025 budget deficit-to-GDP ratio from 3.1% to 3.6%, while the ratio for 2026 was adjusted from 2.8% to 3.5%.