Macro and Politics

* The CBT decided to resume one-week repo auctions, which had been suspended since March 1, as part of its Turkish lira liquidity management framework, while reiterating that liquidity management instruments would be used effectively in line with market conditions. The move aims to steer money market rates, which have recently been forming around the upper bound of the interest rate corridor (40%), back towards the policy rate (37%). Given the prevailing liquidity surplus, we expect this convergence to take place primarily through a gradual decline in the rates formed at deposit buying auctions, through which excess liquidity is sterilized. We view the move as consistent with our year-end 2026 policy rate forecast of 35% and believe that the normalization in money market rates could create additional room for policy rate cuts in the final quarter of the year. <br>* The CBT will release the August Sectoral Inflation Expectations (SIE) Survey @ 10:00 local time. According to latest July SIE survey results, 12-month-ahead inflation expectations rose by 0.14pp to 23.95% for market participants, while declining by 0.60pp to 32.5% for the real sector and by 1.19pp to 44.94% for households. Meanwhile, the August Survey of Market Participants released last week showed that market participants’ 12-month-ahead CPI inflation expectation declined to 23.7% from 24.0%. Following the slightly softer-than-expected July inflation print, we expect the modest improvement observed in market participants’ inflation expectations to extend to real-sector and household expectations in August. <br>*The unadjusted Real Sector Confidence Index (RSCI) increased by 0.6 points to 102.8 in August, while the seasonally adjusted index rose by 1.2 points to 102.4. Looking at the sub-components, expectations regarding export orders, production and total employment over the next three months, together with assessments of current total orders, total orders over the past three months and fixed capital investment expenditure, contributed positively to the headline index, while the general business outlook weighed on the index. Meanwhile, the Capacity Utilization Rate (CUR) declined from 73.9% to 73.5% in August, while the seasonally adjusted measure eased from 73.8% to 73.5%. Following the recovery in manufacturing activity in the second quarter, leading indicators for the third quarter have so far provided mixed signals. Indeed, the continued decline in the CUR despite the improvement in the RSCI in August suggests that the recovery in manufacturing activity has yet to become broad-based. Accordingly, we do not envisage a pronounced and broad-based acceleration in economic activity and maintain our cautious medium-term growth outlook, keeping our 2026 GDP growth forecast unchanged at 3.2%. <br>* The Consumer Confidence Index rose from 89.8 to 90.8 in August, reaching its highest level since May 2023, while its three-month moving average increased from 87.8 to 89.5. Looking at the sub-components, the financial situation of household at present, the financial situation expectation of household over the next 12 months, and the general economic situation expectation over the next 12 months all improved, while the assessment on spending money on durable goods over the next 12 months remained unchanged at 105.1. The fact that the propensity to spend on durable goods has recently failed to keep pace with the improvement in the headline index reinforces signs of cooling domestic demand. Meanwhile, the composition of the August data suggests that the rise in consumer confidence continues to be driven predominantly by an improvement in expectations.