International bank Citi forecasts that the Central Bank of Turkey will keep interest rates steady in September, citing a rise in inflation expectations even as the economy's growth outlook deteriorates.
Survey data published by the Central Bank of Turkey show that GDP growth expectations fell to 3.1% in August, down from 3.84% in March. This marks the fifth month in a row that the survey’s growth projection has declined. Despite the weaker outlook for domestic demand, the economy has not yet experienced meaningful disinflation.
On inflation expectations, the survey indicates a notable uptick. Twelve-month inflation expectations climbed 159 basis points from their February low to reach 23.69%. Meanwhile, the 24-month inflation measure moved above 18% for the first time since January 2025. Citi interprets these shifts as signs that the central bank’s inflation anchor is under pressure.
Citi highlights a policy dynamic that has complicated the disinflation process. The recent alignment of funding with the 37% one-week repo rate is characterized in the survey as an effective easing of the policy stance. Under these conditions, the exchange rate is expected to shoulder more of the burden for achieving disinflation, rather than conventional interest-rate tightening.
Policymakers also face additional headwinds from a challenging global environment, which Citi says exacerbates domestic pressures. These combined factors limit the central bank’s room to manoeuvre. As a result, Citi sees limited scope for rate reductions in the second half of 2026 and projects that the policy rate will finish the year at 35%, lower than current levels.
Taken together, the survey outcomes and Citi’s assessment point to a policy approach that balances the risks of persistently high inflation expectations against weakening domestic demand, while external conditions further complicate the task for monetary authorities.