Citi's year-end interest rate forecast for the CBRT

Citi Research has published its assessment of the Turkish economy and monetary policy following the August inflation data. The report emphasized that despite the weakening in domestic demand, no significant progress has been made in the disinflation process, and inflationary pressures remain resilient.

The bank announced that it does not expect the Central Bank of the Republic of Türkiye (CBRT) to change its policy rate at the Monetary Policy Committee meeting in September. According to Citi, the room for interest rate cuts in the second half of the year will remain limited, and the policy rate will finish 2026 at the 35 percent level.

DETERIORATION IN INFLATION EXPECTATIONS

The report also pointed to data from the CBRT Survey of Market Participants. Accordingly, the GDP growth expectation for 2026 has declined for the fifth consecutive month. The year-end growth expectation, which was 3.84 percent in March, has been revised down to 3.1 percent.

Citi analysts stated that despite the decline in growth expectations, the desired level of easing in price pressures has not been observed. The report noted that the 12-month-ahead inflation expectation has risen by 159 basis points since its low in February, reaching 23.69 percent.

The fact that the 24-month-ahead inflation expectation exceeded the 18 percent threshold for the first time since January 2025 was also among the points highlighted in the report. According to Citi, this outlook indicates a weakening not only in the short-term inflation path but also in the expectation anchor.

In August, annual CPI was recorded at 31.51 percent. This rate remained slightly below the market expectation of 31.60 percent and Citi's forecast of 31.70 percent. The report stated that the relatively calm trend in food prices and the moderate outlook in the clothing group were effective in this limited deviation.

On the other hand, it was stated that core inflation indicators remain around 30 percent annually, while services inflation continues to hover near 40 percent. Citi assessed that seasonally adjusted data does not point to a significant improvement in the main inflation trend.

The report also interpreted the CBRT's alignment of the funding cost with the one-week repo rate at the 37 percent level as a limited easing step in monetary policy. Citi argued that despite weakening domestic demand, the resistance in inflation shows that the shocks are supply-side and structural in nature rather than temporary.

The bank expects inflation to finish the year at a point close to its current levels, slightly above the 30.9 percent level at the end of 2025.

News Source: 12punto