Macro and Politics

* The CBT will release July Real Effective Exchange Rate (REER) today @14:30 local time. Our calculations based on the average equally weighted currency basket in July, the monthly inflation print, and a weighted geometric external price index constructed using our model-based estimates for July inflation across Turkey's major trading partners, point to a rise in the CPI-based real effective exchange rate (REER) to around 105.2–105.3 in July from 104.9 in June. This implies a monthly real appreciation of the Turkish lira of approximately 0.3%–0.4%.

* TURKSTAT will release July seasonally adjusted CPI and core CPI aggregates today @16:00 local time. Based on our calculations, we estimate that seasonally adjusted (SA) monthly CPI inflation came in at 2.2% in July, while CPI-B and CPI-C recorded increases of 1.9% and 2.2%, respectively. We expect today’s official adjusted figures to be broadly in line with our estimates.

* The CBT will release the Monthly Price Developments report for July 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 increased by 1.8% m/m in July, perfectly in line with our forecast. The market consensus also centered in the 1.8% – 1.9% range. As a result, annual CPI inflation edged down to 31.8% from 32.1%. Core indicators remained broadly contained, with Core-B and Core-C posting monthly increases. of 1.7% and 1.8%, respectively, bringing annual inflation to 31% and 29.9%. Producer prices (PPI) rose by 1.5% m/m, while annual PPI inflation eased to 27.8% from 28.1%. July's monthly CPI increase mainly reflected administered price and tax adjustments, alongside a pickup in food inflation led by higher vegetable prices. The health category recorded the strongest monthly increase, rising 10.7%, following higher examination co-payments at public and private healthcare providers under the revised Health Implementation Communiqué. Transportation ranked second with a 2.6% monthly increase, followed by restaurants and hotels at 2.3%. Meanwhile, clothing and footwear posted the weakest monthly reading, declining 3.9% on seasonal factors. We refrain from interpreting the decline in annual CPI inflation in July as a return to disinflation, as we expect annual inflation to remain broadly stable at around 31.6% in August before favorable base effects come into play in September, bringing annual CPI inflation closer to 30%. We then expect the disinflation trend to become more pronounced in the final months of the year. Provided that price developments remain consistent with our projected path, we maintain our year-end CPI inflation forecast at 28%.

* The Istanbul Chamber of Industry (ICI) Turkey Manufacturing PMI rose to 47.7 in July from 47.1 in June. However, with the headline index remaining below the 50-threshold, the downturn in manufacturing activity extended into its 28^th consecutive month. In its accompanying note, the ICI noted that challenging conditions in the manufacturing sector persisted amid weak market conditions and slowing new orders. Firms continued to scale back production, employment and purchasing activity in July. Moreover, the July ICI Turkey Sectoral PMI survey showed that only three of the ten monitored sectors recorded simultaneous increases in both output and new orders. In contrast, the sharpest slowdown in new orders emerged in the basic metals sector, while food products posted the steepest decline in output for a second consecutive month. We summarize our near-term outlook for industrial activity as follows: The trend in intermediate goods imports excluding gold and energy points to stronger industrial production in June. In addition, the disappearance of the bridge-day effect associated with the Eid al-Adha holiday, together with more supportive base effects, leads us to expect industrial production to return to positive territory in June. Looking ahead to the second half of the year, we expect the gradual easing in financial conditions and the decline in geopolitical uncertainty to moderate the loss of momentum in economic activity and support a more balanced growth profile. We maintain our 2026 GDP growth forecast at 3.2%.