Macro and Politics

*The Treasury will hold 2y fixed coupon and 4y TLREF indexed bond auctions today. The 2y bond, maturing on September 13, 2028, will be issued for the first time and will become Turkey’s new 2y benchmark government bond once it starts trading. Following today’s auctions, the Treasury will hold auctions of 5y and 8y fixed-coupon bonds tomorrow, alongside a direct sale of a 2y lease certificate, thereby completing its September domestic borrowing program. Under its September–November 2026 domestic borrowing strategy, the Treasury plans to raise a relatively modest TL110.4bn from the domestic market against TL296.7bn of redemptions in September, implying a rollover ratio of 37.2%.

* The current account posted a modest surplus of USD36mn in July, below both our forecast of USD615mn and the market median of USD650mn. The lower-than-expected surplus brought the cumulative current account deficit to USD34.8bn in Jan–Jul, marking a notable widening from USD24.3bn in the same period of last year. On a trailing 12-month basis, the current account deficit widened to USD40.7bn in July from USD38.9bn. The current account balance excluding gold and energy (core balance) posted a surplus of USD5bn, while the trailing 12-month core surplus narrowed to USD27.8bn from USD29bn. For August, we expect the current account to post a surplus of USD4.4bn. Our projections point to a narrowing in the balance of payments-defined foreign trade deficit to USD2bn, alongside net travel revenues exceeding USD7bn and the services surplus reaching around USD9.5bn. We maintain our year-end current account deficit forecast at USD54bn, equivalent to 3% of GDP.

* The CBT released its September 2026 Survey of Market Participants. Respondents’ year-end inflation expectations for 2026 and 2027 rose to 29.6% from 29.4% and to 22.7% from 21.9%, respectively. The 12-month-ahead inflation expectation remained unchanged at 23.7%, while the 24-month-ahead expectation increased to 18.3% from 18%. The five-year-ahead inflation expectation also rose notably to 12.1% from 11.1%. Participants’ monthly CPI inflation expectations stand at 2.1% for September, 2% for October and 1.1% for November. We expect monthly CPI inflation at around 2% in September, bringing annual inflation closer to 30%. We maintain our year-end inflation forecast at 28%, although the recent escalation in geopolitical risks and higher energy costs have tilted the risks to our forecast more clearly to the upside. Market participants expect the MPC to cut the policy rate by 100bp to 36% at its October 22 meeting, followed by another 100bp cut to 35% at the December 10 meeting. Our baseline scenario is aligned with this path, with 100bp cuts in both October and December bringing the policy rate to 35% by year-end. However, should the inflation outlook fail to improve as much as we currently expect, the scope for rate cuts could be more limited than in our baseline scenario.