TRY: Keeping an eye on inflation expectations ahead of rate meeting – Commerzbank

The latest version of market inflation expectations, published on Friday by Turkey’s central bank (CBT) showed inflation expectation for end-2025 rising by 2pp from 28% to 30%. The margin is not insignificant. Just to recall, in the previous March survey, which had been cited by a jubilant minister Simsek on social media, inflation expectations for end-2025 had fallen from 28.3% to 28%. As an aside, longer-term expectations always move by less – inevitably, visibility is higher in the near term – hence, it is of no comfort that one-year and two-year forward expectations rose by less, Commerzbank's FX analyst Tatha Ghose notes.

Lira’s fundamental troubles aren't over

"A few subsidiary findings could be of interest: for example, the survey implies that CBT’s current projections are already outdated – CBT currently forecasts 24% inflation for end-2025, with a tolerance ceiling of 29%; even the most bullish among survey participants now forecast faster than 29% inflation. Another observation would be that this market survey puts the consensus forecast for USD/TRY (end-2025) at 43.6 and for one-year ahead (so end-March 2026) at 45.9, which are more bearish than our own respective 42.0 and 43.0, for the same timeframes. Perhaps, we are not cautious enough."

"Last but not least, other inflation measures such as the Istanbul cost of living index (which is recording c.50% inflation), household inflation expectations (which are collected as part of another survey and are stuck at a much higher c.60%), as well as polls and analysis conducted by Reuters, Bloomberg and the Koc University point to escalating inflation expectations. This is not an environment to start considering rate cuts again."

"It is true that USD/TRY drifted below the 38.0 ‘line of defence’ briefly after US tariffs were paused, the oil price was low and risk assets were rallying, but this was hardly a sign that the lira’s fundamental troubles are over. We see significant risk to the exchange rate in the event CBT considers resuming rate cuts in the coming months."