Macro and Politics

* The CBT will release August Real Effective Exchange Rate (REER) today @14:30 local time. Based on the average change in the equally weighted currency basket in August, the monthly inflation outturn, and our assumption for the weighted geometric foreign price index derived from inflation forecasts for Turkey’s trading partners, we estimate that the CPI-based real effective exchange rate will point to a monthly real depreciation of around 0.6% in the TL in August.

* The CBT will release the Monthly Price Developments report for August 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.

* August CPI came in at 1.8% m/m, below our 2.1% forecast and market median estimates of 1.9%–2.0%. Accordingly, annual inflation eased slightly to 31.5% from 31.8%. Core inflation remained relatively contained, with both the Cpre-B and Core-C rising by 1.8% m/m, while their annual rates stood at 30.7% and 30.1%, respectively. The relatively moderate headline increase was supported by an 8.2% m/m decline in fresh fruit and vegetable prices, which helped limit food inflation to just 0.2%. Meanwhile, the temporary suspension of the special consumption tax (SCT) on diesel mitigated fuel-related price pressures. Nevertheless, energy prices rose by a sizeable 5.5% m/m, with diesel and gasoline prices increasing by 14.1% and 9.1%, respectively. Services inflation remained sticky, rising by 3.1% m/m and accelerating to 40.3% y/y from 39.7%. Rent inflation remained elevated at 3.0% m/m. By contrast, core goods prices declined by 0.3% m/m, consistent with the ongoing moderation in domestic demand conditions. We expect favorable base effects to bring annual CPI close to 30% in September, followed by a continued disinflation trend in 4Q26. We maintain our 2026 year-end inflation forecast at 28%. Yet, the renewed escalation in the US-Iran war and the resulting rise in Brent crude to around USD95/bbl have increased upside risks to our forecast through stronger energy-driven supply-side inflationary pressures.

* Foreign investors recorded a net purchase of USD329mn in the equity market in the August 21–28 week, while posting a net sale of USD86.6mn in the bond market, excluding repo transactions. This marked the fourth consecutive week of foreign inflows into equities, while net foreign outflows from the bond market extended into a third week. Moreover, foreigners’ share in the total bond stock edged down from 7.1% to 7% over the same period. Over the same period, residents’ FX deposits (excluding gold and adjusted for the EUR/USD parity effect) declined by USD2.0bn, while their total FX deposits (including gold, adjusted for the price effect) declined by USD2.7bn. Besides, The CBT’s FX reserves posted a modest decline in the August 21–28 week. Gross FX reserves decreased by USD252mn to USD188.2bn, while net FX reserves fell by USD298mn to USD66.5bn. The swap stock declined by USD264mn to USD10.7bn over the same period, while net reserves excluding swaps remained broadly unchanged at USD55.8bn.