JPMorgan Sees Turkey Scaling Back Rate Cuts After High Inflation Data

Turkey’s central bank is likely to scale back planned interest rate cuts, beginning with only 200 basis points next week, after inflation in August came in above expectations, driven by surging food and services, JPMorgan said on Wednesday. The revised forecast reflects growing concerns about persistent price pressures and the need to maintain monetary credibility amid ongoing economic and political challenges.

Inflation came in higher than expected at nearly 33% annually and more than 2% on a monthly basis, readings that came after stronger-than-expected second-quarter economic growth was reported on Monday. The dual challenge of elevated inflation and robust growth complicates the Central Bank of the Republic of Turkey’s (CBRT) monetary policy calculations as it seeks to balance price stability with economic expansion.

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Inflation Dynamics and Market Expectations

The August inflation reading of 33% year-on-year represented only a modest decline from July’s 33.5%, falling short of analyst expectations for a more substantial deceleration to 32.6%. The persistence of elevated price pressures has forced market participants to reassess their expectations for the pace of monetary easing, with implications extending beyond the September 11 policy meeting.

JPMorgan said it now sees upside risks to its year-end inflation forecast of 29.5%, citing a reversal in earlier food price declines and strong domestic demand. The bank expects inflation to rise to 31.8% year on year in September, partly driven by back-to-school services repricing, a seasonal factor that typically adds to price pressures during the autumn months.

The monthly inflation rate of more than 2% in August signals that underlying price pressures remain robust, suggesting that the disinflation process may be more gradual than previously anticipated. Food prices, which had provided some relief in earlier months, showed renewed strength, while services inflation remained persistent, reflecting strong domestic demand conditions.

Monetary Policy Recalibration and Strategic Considerations

The central bank “is likely to keep the policy rate well above headline CPI inflation to prevent dollarisation among Turkish residents, especially in light of recent political turmoil,” JPMorgan said in a research note. This strategic positioning reflects the CBRT’s recognition that maintaining real interest rates in positive territory is crucial for preserving monetary credibility and supporting the Turkish lira.

The central bank has a policy meeting next Thursday, September 11, where officials will need to balance competing pressures from persistent inflation, robust economic growth, and market expectations for continued monetary easing. JPMorgan now expects a policy rate cut of 200 basis points at the meeting, down from a previously anticipated 300 basis points.

The revised forecast also includes further 200-basis-point reductions in October and December, which would bring the policy rate to 37% by year-end, slightly above JPMorgan’s earlier estimate of 36%. This more cautious trajectory reflects the need to maintain adequate policy tightness to support the disinflation process while avoiding premature easing that could undermine price stability objectives.

Economic Growth Momentum and Domestic Demand Strength

The revision to monetary policy expectations comes against the backdrop of surprisingly robust economic performance in the second quarter of 2025. Turkey’s GDP grew by 4.8% year-on-year, significantly exceeding market consensus expectations of 4.1% and marking a notable acceleration from the first quarter’s 2.3% growth rate.

The strong growth performance was driven primarily by robust private consumption and increased investment activity. Private consumption rose by 5.1% year-on-year, contributing 3.4 percentage points to headline GDP, while investments grew by 8.8% year-on-year, adding 2.2 percentage points to GDP growth.

On a quarterly basis, the economy expanded by 1.6% in the second quarter, representing the highest quarterly increase in the past two years. This unexpected momentum occurred despite tighter financial conditions following political developments in March 2025, demonstrating the resilience of Turkey’s domestic economy.

The construction sector emerged as a significant contributor to growth, rising 11% year-on-year from April to June, while the information and communications sector increased 7% and industry posted a solid 6% rise. However, agriculture fell 3.5% year-on-year, as Turkish farms were hit hard by spring frosts and summer drought conditions.

Historical Context and Policy Evolution

Turkey’s current monetary policy stance represents a significant evolution from the experimental approaches of previous years. The CBRT currently maintains a policy rate of 43%, following a 300 basis point cut in July 2025 from the previous 46% level.

The July rate cut marked the first reduction since April, when the bank had hiked rates to 46% in response to political turmoil surrounding the arrest of Istanbul Mayor Ekrem Imamoglu. That episode demonstrated the central bank’s responsiveness to market pressures and its commitment to defending the lira during periods of heightened uncertainty.

The central bank’s current approach reflects a more orthodox monetary policy framework implemented following the appointment of new economic leadership after the May 2023 elections. This shift toward conventional monetary policy tools has helped restore some credibility to Turkey’s economic management, though significant challenges remain in achieving sustainable price stability.

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Currency Dynamics and Dollarization Concerns

The emphasis on preventing dollarization reflects ongoing concerns about Turkish residents’ tendency to hold foreign currency during periods of economic uncertainty. The lira has experienced significant volatility over recent years, with the currency now trading at approximately 42.23 per dollar in the third quarter of 2025.

Maintaining real interest rates significantly above inflation is seen as crucial for encouraging lira-denominated savings and reducing the appeal of foreign currency holdings among Turkish residents. The CBRT’s strategy relies on keeping policy rates “well above headline CPI inflation” to create sufficient incentives for lira holdings while supporting the currency’s stability.

The central bank has also employed foreign exchange interventions to support the lira during periods of heightened volatility, though officials prefer to rely primarily on interest rate policy and other conventional tools. The bank’s foreign reserves provide some capacity for market intervention, though maintaining adequate reserves remains a consideration in policy formulation.

Sectoral Performance and Economic Drivers

The second quarter’s strong economic performance was broadly based, with multiple sectors contributing to growth momentum. The services sector was the largest contributor, adding 1.5 percentage points to GDP, while the industrial sector followed with a 1.2 percentage point contribution, showing signs of recovery after three consecutive quarters of negative impact on headline growth.

Construction activity remained particularly robust, with construction investments reaching 11.6% year-on-year growth, supported by both public infrastructure projects and private development activity. Machinery and equipment investments also showed signs of recovery, turning positive with a 0.3% year-on-year increase after several quarters of decline.

The strength in domestic demand has important implications for monetary policy, as robust consumption and investment activity can contribute to inflationary pressures through increased capacity utilization and labor market tightening. The central bank must balance supporting continued growth with preventing demand-driven inflation from becoming entrenched.

Regional and Global Context

Turkey’s monetary policy challenges occur within a broader context of global economic uncertainty and regional geopolitical tensions. The country’s strategic location and economic ties to both European and Middle Eastern markets create additional complexities for policy formulation, particularly regarding trade flows and capital movements.

The persistence of relatively high inflation in Turkey contrasts with disinflation trends in many developed economies, reflecting both structural factors and the legacy of previous unconventional monetary policies. The gradual normalization of policy frameworks represents an ongoing process that requires sustained commitment to conventional economic management principles.

Global commodity price movements, particularly for energy and food products, continue to influence Turkey’s inflation dynamics given the country’s import dependence for key inputs. The central bank must consider these external factors while focusing primarily on domestic demand management and expectations anchoring.

Market Response and Investment Implications

The reassessment of monetary policy expectations has implications for Turkish financial markets and investment flows. The BIST 100 Index remains sensitive to central bank policy decisions and inflation developments, with investors closely monitoring the balance between growth support and price stability objectives.

Bond markets have shown mixed reactions to the evolving policy outlook, with yields reflecting expectations for a more gradual easing cycle than previously anticipated. The combination of higher inflation and robust growth creates a challenging environment for fixed-income investors, who must navigate changing interest rate expectations and currency volatility.

Foreign portfolio investment flows have shown some recovery following the policy normalization efforts, though volumes remain sensitive to both domestic developments and global risk appetite. The central bank’s commitment to maintaining real positive interest rates provides some support for foreign investor confidence, though execution remains critical.

Fiscal Policy Coordination and Structural Considerations

The monetary policy outlook occurs within a broader context of fiscal policy coordination and structural economic reforms. The government’s fiscal stance and public spending patterns influence domestic demand conditions and, consequently, inflation pressures that the central bank must address through monetary policy tools.

Structural factors including energy market dynamics, labor market conditions, and productivity growth rates all influence the underlying inflation process. The central bank’s ability to achieve sustainable price stability depends partly on progress in addressing these structural elements through coordinated policy efforts.

The ongoing process of rebuilding monetary policy credibility requires sustained commitment to transparent, data-dependent decision-making processes that prioritize price stability objectives while considering broader economic conditions.

Outlook and Strategic Considerations

Looking ahead, the central bank faces the challenge of navigating between competing pressures while maintaining credibility and supporting sustainable economic development. The September 11 policy meeting will provide important insights into officials’ assessment of current conditions and their commitment to the gradual disinflation process.

The path forward likely requires continued vigilance regarding inflation expectations and careful calibration of policy adjustments to support the disinflation process without unnecessarily constraining economic growth. Success in achieving sustainable price stability would enhance Turkey’s long-term economic prospects and investment attractiveness.

The evolution of monetary policy will depend critically on incoming inflation data, economic growth patterns, and global economic conditions. The central bank’s communication strategy and market guidance will play important roles in managing expectations and supporting policy effectiveness.

Conclusion

JPMorgan’s revised forecast for Turkey’s monetary policy reflects the complex challenges facing the CBRT as it seeks to balance multiple objectives in a dynamic economic environment. The combination of persistent inflation pressures and robust economic growth requires careful policy calibration to support sustainable disinflation while maintaining economic momentum.

The central bank’s commitment to keeping policy rates “well above headline CPI inflation” demonstrates recognition of the importance of maintaining real positive interest rates for monetary credibility and currency stability. However, the precise pace and extent of future rate adjustments will depend on evolving economic conditions and the success of ongoing disinflation efforts.

As Turkey continues its transition toward more orthodox economic policies, the monetary policy decisions in the coming months will be closely watched as indicators of the authorities’ commitment to sustainable price stability and economic normalization. The September 11 policy meeting represents an important milestone in this ongoing process, with implications extending beyond immediate market reactions to broader questions of economic policy credibility and long-term stability.

The Central Bank of the Republic of Turkey’s next monetary policy meeting is scheduled for September 11, 2025, with market participants closely monitoring inflation data and policy communication for signals about the future direction of interest rates and economic policy.

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By: Montel Kamau

Serrari Financial Analyst

4th September, 2025