Turkish Lira: Inflation Expectations Exceed Central Bank Forecasts – Commerzbank

Commerzbank analyst Tatha Ghose examined Turkey's inflation dynamics in a latest report, noting that seasonally adjusted monthly price momentum remains above 2%, and warning that the "disinflation" process anticipated by the market is unlikely to materialize. The trigger lies in market participants having raised their year-end consumer price index (CPI) expectations to 29.5%, surpassing the Central Bank of the Republic of Turkey's (CBRT) own forecast of 28%.

**Inflation Expectation De-anchoring Undermines Central Bank Credibility**

Ghose believes that the Turkish central bank's repeated chasing of private sector forecasts is continuously eroding its policy credibility. Although the overall inflation rate has fallen significantly from a peak of around 75% in May last year, persistently elevated monthly inflation data indicates that the underlying momentum of price increases remains stubborn. This gap between expectations and reality poses a severe challenge for the central bank in guiding market expectations.

**Lira Remains Under Sustained Pressure**

The deterioration in inflation expectations has directly transmitted to the foreign exchange market. After the Turkish lira fell below the 48.10 level against the U.S. dollar, elevated monthly inflation data continues to exert downward pressure on the lira. As of the time of writing, the dollar was trading near 48.13326 against the Turkish lira, with the market closely monitoring the central bank's subsequent policy signals to assess whether the lira can stabilize.

**Policy Outlook Faces Test**

Although the Turkish central bank had previously forecast inflation to fall to 24% by the end of 2025, current market expectations have far exceeded this level, even surpassing its set tolerance ceiling of 29%. Reports indicate that the central bank has recently resumed its rate-cutting cycle, but emphasized that future decisions will be "centered on the inflation outlook, assessed prudently on a meeting-by-meeting basis." Against a backdrop where inflation expectations have yet to be anchored, striking a balance between supporting economic growth and maintaining price stability will be a major test for Turkish policymakers.