Year-end inflation expectation in the economy fixed at 25 percent

Evaluating the Central Bank of the Republic of Turkey's latest interest rate cut, BBVA Research stated that the rise in food prices, in particular, could create pressure on consumer inflation beyond expectations. In the analysis conducted by the institution, it was pointed out that there is a possibility that January inflation may materialize higher than anticipated, while a limited deterioration in core inflation is expected.

It was emphasized that preventing a potential worsening in expectations following the activity experienced in the economy at the beginning of the year is one of the Central Bank's main objectives.

BBVA Research stated that the effects on demand conditions are diminishing, noting that the Central Bank also acknowledges this situation. Accordingly, the idea that economic demand may not have cooled sufficiently to reach the targeted inflation remains on the agenda.

In its analysis, BBVA Research drew attention to upside risks in economic activity and inflation, while maintaining the assumption that disinflation will continue in its main scenario. However, it was also underlined that the balance of risks is shifting toward more persistent inflation and upside surprises in economic growth.

Although the Central Bank's decision to cut the policy rate by 100 basis points to 37 percent remained below market expectations, it was evaluated as a positive development. It was also noted that this decision, along with the adjustments made to the interest rate corridor, does not offer a pre-determined easing schedule in the market.

BBVA Research predicts that the Central Bank may continue with gradual interest rate cuts until the second half of the year, and that a total cut of 100 basis points is possible by the end of 2026. While it is estimated that the policy rate will be at the 32 percent level by the end of the year, it was assessed that a tight stance in monetary policy will be maintained.

In this context, the institution stated that it maintains its year-end inflation forecast at 25 percent and that cautious steps in monetary policy will continue.