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Global banks turned more cautious on Türkiye's monetary policy outlook after July inflation reinforced concerns over persistent underlying price pressures, despite coming in slightly below market expectations, prompting analysts to push back rate-cut expectations for the central bank.
While annual inflation eased to 31.8% in July after consumer prices rose 1.8% from the previous month, major financial institutions argued that sticky underlying inflation, elevated services prices and uncertainty over energy costs continue to leave limited room for monetary easing in the near term.
U.S.-based investment bank Goldman Sachs argued that interest rates may need to remain elevated for longer, citing rising inflation risks from a renewed surge in oil prices, particularly as Türkiye phases out its fuel tax mechanism by September, which was used to temper the impact of higher fuel prices on consumers.
Although headline inflation declined for a second consecutive month, it remained well above the central bank's 26% year-end target, reinforcing expectations that policymakers will maintain a cautious stance, Goldman Sachs argued.
The bank's economists added that they see upside risks to Goldman Sachs' 29% year-end inflation forecast, warning that higher energy prices and a faster depreciation of the Turkish lira strengthen the case for keeping interest rates elevated for longer.
Despite signs of deterioration in services inflation during July, Goldman Sachs said broader underlying inflation trends continued to improve.
"All of our core inflation indicators pointed to a broad-based improvement in underlying inflation in July, bringing the three-month moving average of core inflation momentum back to first-quarter levels," the economists wrote.
Another U.S. bank, Citi, also adopted a more cautious stance following the July inflation release, arguing that the inflation outlook remains more challenging than the CBRT anticipates.
The bank highlighted that the monthly inflation reading of 1.8% came in slightly above the path implied by the CBRT's second Inflation Report.
Citi projects Türkiye's inflation will rise to 31.8% by the end of 2026 and believes there is only limited scope for rate cuts in the second half of the year.
BBVA also warned that the gradual phaseout of the fuel tax mechanism and scheduled price increases are likely to put upward pressure on inflation in August and September. The Spanish lender also cautioned that elevated inflation expectations, volatile energy prices and persistent inflation inertia remain key risks.
Assuming energy prices normalize and policymakers maintain a prudent stance, BBVA projects the average funding cost will begin moving closer to the policy rate from September and expects the policy rate to decline to 36% by year-end if conditions allow, while forecasting inflation will ease to 30% by the end of the year.
The CBRT will publish its third Inflation Report on Aug. 13, with markets watching for any changes after the bank revised its year-end inflation forecast to 26% and raised its 2026 interim inflation target to 24% in May because of war-driven energy risks and heightened geopolitical uncertainty.
The report's guidance will also provide clues about policymakers' stance ahead of the Sept. 10 Monetary Policy Committee (MPC) meeting and the future path of interest rates.
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