Macro and Politics

* The CBT has published its 2026 Monetary Policy framework, reaffirming price stability as the primary objective. Within the 5% inflation target (±2pp uncertainty band), the Bank underscores that monetary policy in 2026 will continue to be conducted within a framework in which the policy rate remains the main instrument, supported by interim targets and a published forecast path, and reinforced by macroprudential measures when warranted. The CBT reiterates that the KKM scheme has been fully phased out and notes that the share of TL deposits has risen to 61%, adding that the policy stance in 2026 will continue to prioritize TL-denominated savings and longer-term funding. The Bank once again stresses that it does not target any specific level or direction for the exchange rate, while stating that reserve accumulation will continue subject to favorable market conditions. To support the monetary transmission mechanism, the CBT will maintain the active use of its broad liquidity management toolkit, with the primary objective of keeping overnight market rates aligned with the policy rate. In this context, one-week repo auctions will remain the main funding instrument, while repos at different maturities and intraday liquidity tools may be deployed as needed. The CBT sets the size of its APİ portfolio at TL450bn for 2026 and indicates that, in addition to TL67.7bn of redemptions during the year, outright bond purchases will continue in order to enhance operational flexibility. Excess liquidity will continue to be sterilized through repos, deposit auctions, swap transactions and liquidity bills, with liquidity and reserve management conducted - absent any exchange-rate target - in a manner consistent with supporting price stability. Overall, the 2026 Monetary Policy text points to a cautious, tight and data-dependent stance throughout the disinflation process.

* According to the CBT’s Sectoral Inflation Expectations Survey for December, 12-month-ahead annual inflation expectations declined across all sectors compared to the previous month. Accordingly, expectations eased by 0.14pp to 23.35% for market participants, by 0.9pp to 34.8% for the real sector, and by 1.34pp to 50.9% for households. While inflation expectations across economic agents have followed a downward trend since early 2024, the pronounced divergence between sectors remains intact. Considering the adaptive nature of expectations among economic agents and our inflation forecasts, we expect the gradual easing in sectoral inflation expectations to persist in the period ahead. We expect the monthly CPI increase to remain below 1% in December, at around 0.8%. Accordingly, we forecast year-end inflation for 2025 to settle within the 30.5–31% range. We expect the disinflation process to extend into 2026, albeit at a slower pace compared to 2025. Our year-end 2026 CPI forecast stands at 23%.