Macro and Politics

*The CBT will release December Balance of Payment figures today @10:00 local time. We expect the current account balance to post a deficit of USD5.15bn in December. We project the balance-of-payments-defined foreign trade deficit to widen to USD6.6bn, while the services surplus is likely to moderate to USD3.1bn amid weaker net travel revenues. Accordingly, we now expect the current account deficit to close 2025 at around USD24bn (1.5% of GDP), above our previous house forecast of USD20bn (1.3% of GDP). For 2026, we have currently revised our year-end current account deficit forecast upward to USD30bn (1.7% of GDP), from USD25bn (1.5% of GDP), reflecting a more challenging external balance outlook.

* The CBT will release the results of the February Market Participants’ Expectations Survey today @ 10:00 local time. Following the higher-than-expected January CPI realizasitons, and the CBT’s analytical note suggesting that the CPI methodological revision could add roughly 1pp to annual inflation, we expect to see upward revisions to market participants’ year-end 2026 CPI expectations in the February survey round. While we have maintained our house year-end CPI forecast at 23%, we assess that upside risks to our projection have increased meaningfully in the aftermath of the January data. The combination of stronger-than-anticipated price dynamics and methodological adjustments implies a more challenging near-term inflation outlook. We continue to expect the disinflation process to proceed at a slower pace in the first half of the year, with more visible and sustained easing likely to materialize predominantly in the second half.

* During the 1^st Quarterly Inflation Report presentation of the year, the CBT Governor Fatih Karahan announced that the year-end 2026 inflation forecast range was revised upward to 15%–21%, from the previous 13%–19% band, while the interim target was maintained at 16%. For 2027, the forecast range was set at 6%–12%, with the interim target kept unchanged at 9%. The 2028 interim target was introduced at 8%. We view the upward recalibration of the 2026 forecast band, alongside the decision to preserve the 16% interim target, as a carefully calibrated communication strategy. In our assessment, this adjustment acknowledges the increased distance from target while safeguarding the credibility of the medium-term disinflation framework. At the same time, it subtly reinforces the message that the policy stance may need to remain restrictive for an extended period should underlying inflation dynamics fail to moderate in a sufficiently durable manner. Consistent with this assessment of underlying inflation pressures, we expect monthly CPI to remain elevated in February as well, in the 2.8%–3% range. Accordingly, the balance of risks now tilts toward a symbolic 50bps rate cut at the March 12 smeeting, though a full pause cannot be ruled out. We maintain our year-end 2026 policy rate forecast at 29.5%. Our house forecast for year-end CPI stands at 23%, although we assess that upside risks have intensified. We expect annual CPI to move above 31% in February, implying a temporary interruption in the disinflation process, before resuming a downward trajectory as of March. While disinflation is likely to proceed at a relatively gradual pace in the first half of the year, we expect momentum to strengthen in the second half.

* Foreign investors recorded net purchases of USD134.3mn in equities and USD255.6mn in government bonds (excluding repos) during the week of January 30–February 6. Over the same period, the foreign share in the total government bond stock increased to 9%, up from 8.9% previously. Equity inflows thus extended to a tenth consecutive week, bringing cumulative foreign purchases over this ten-week period to USD2.4bn. In the local bond market, foreign participation has exhibited a more sustained and increasingly visible recovery since late October. From the week of October 31 - when inflows began to gain clearer momentum - cumulative foreign bond purchases have reached USD6.8bn. On a year-to-date basis, foreign investors have accumulated USD1.6bn in equities and USD4.5bn in local bonds (excluding repos). Moreover, during the mentioned week, the residents’ FX deposits retreated by USD292mn (excluding gold, EUR/USD parity effect adjusted), while their total FX deposits (including gold, price adjusted) slid by USD114mn during the week of January 30 – February 6. In terms of official reserves, the CBT’s gross FX reserves slumped by USD10.7bn to USD207.6bn, net international reserves dropped by USD2.1bn to USD91.1bn and net reserves excluding swaps eased by USD4.9bn to USD77.6bn.