Macro and Politics

* The CBT will release the July Sectoral Inflation Expectations (SIE) Survey @ 10:00 local time. According to the June Sectoral Inflation Expectations (SIE) Survey, 12-month-ahead annual inflation expectations edged down by 0.01pp to 23.81% among market participants, while remaining unchanged at 33.1% for the real sector. Household inflation expectations, meanwhile, declined more noticeably, falling by 3.38pp to 46.13%. The share of households expecting inflation to decline over the next 12 months increased marginally by 0.1pp to 15.7%, while the proportion anticipating higher inflation fell by 1.46pp to 66.46%. Turning to July, the Survey of Market Participants (SMP) released earlier this week pointed to a largely stable inflation outlook. Participants' year-end CPI forecast for 2026 was revised only marginally higher, from 29.1% to 29.2%, while the 2027 year-end forecast edged up from 21.4% to 21.5%. The 12-month-ahead CPI expectation increased modestly from 23.8% to 24.0%, whereas the 24-month-ahead expectation declined from 18.3% to 17.8%. Longer-term expectations also improved, with the five-year-ahead inflation forecast easing from 11.9% to 11.5%. Overall, the July SMP suggests that inflation expectations remained broadly well anchored despite limited upward revisions at the short end of the curve. We expect the upcoming July SIE results to point to a similar pattern, with household and real sector inflation expectations likewise remaining broadly stable.

* The Monetary Policy Committee (MPC) left the policy rate unchanged at 37%, while keeping the overnight borrowing and lending rates at 35.5% and 40%, respectively, leaving the interest rate corridor intact. The statement placed greater emphasis on weakening domestic demand, noting that the underlying inflation trend eased in June but is expected to rise temporarily in July. While the MPC characterizes the expected increase in July inflation as temporary, we believe renewed US – Iran tensions have increased near-term risks to the inflation outlook. We expect monthly CPI inflation to come in at around 1.8% in July. A July print in line with our forecast would lower annual CPI inflation from 32.1% to 31.8%. While we maintain our year-end CPI forecast at 28%, we believe recent developments have increased the upside risks. Accordingly, we continue to reckon that a gradual normalization in the CBT's funding composition through a return to weekly repo auctions remains the base case, although the timing now appears more likely to be pushed further out. Should higher oil prices prove persistent and global risk sentiment deteriorate further, the return to weekly repo funding could be postponed into the coming months. We continue to believe that room for policy easing will emerge only towards 4Q26 and maintain our year-end policy rate forecast at 35%.

* Foreign investors recorded a modest USD37.5mn net purchase in equities, while the bond market excluding repo transactions attracted a USD196.6mn net foreign inflow during the July 10 – 17 period. This marked the fifth consecutive week of foreign buying in equities; however, the cumulative inflow over the past three weeks amounted to only USD82.5mn, pointing to a moderation in foreign demand. Meanwhile, foreign inflows into the bond market excluding repo transactions extended into a sixth consecutive week, with cumulative purchases reaching a robust USD3.2bn over the period. Foreigners’ share in the total bond stock remained unchanged at 6.8% during the week. During the same period, residents' FX deposits excluding gold and adjusted for the EUR/USD parity effect increased by USD4.8bn, while their total FX deposits including gold, adjusted for gold price effects, increased by USD5.2bn. Over the same period, the CBT's gross FX reserves declined by USD2.8bn to USD160.5bn, while net FX reserves fell by USD5.1bn to USD51.1bn. The swap stock decreased by USD263mn to USD13.5bn, while net reserves excluding swaps declined by USD4.8bn, reaching USD37.6bn.

*Credit rating agency Moody's is scheduled to release Turkey’s sovereign rating review today. It’s important to note that these calendars are only reference points and do not guarantee that the agencies will conduct a review or make a new rating decision. Any potential announcement would be expected after market close. Moody's last upgraded Turkey's sovereign rating on July 25, 2025, raising it from B1 to Ba3 while revising the outlook from positive to stable. The agency attributed the upgrade to improved policy effectiveness and strengthening foreign investor confidence in the Turkish lira, while also emphasizing that the reduced likelihood of a reversal in the current policy framework had been a key consideration behind the decision. At the same time, Moody's underscored that Turkey remains vulnerable to large BoP shocks. We do not expect Moody's to make any changes to either Turkey's Ba3 sovereign rating or its stable outlook in today's scheduled review.