Turkish Lira: Market doubts disinflation and Lira stability – Commerzbank

Commerzbank's Tatha Ghose highlights that the Central Bank of the Republic of Türkiye's (CBRT) survey reveals market participants adjusting their inflation forecasts upwards and anticipating only a gradual reduction in interest rates. While traders are marginally more hopeful about the USD/TRY pair's end-of-year outlook compared to Commerzbank's prediction, the convergence of one-year-ahead forecasts suggests a lack of strong confidence in ongoing disinflation or a stable Turkish Lira.

Following a critique of the inflation report forecasts and the lira's outlook, the CBRT's own survey of market participants further emphasizes deteriorating expectations. The survey predicts inflation at 29.2% for the end of 2026 (revised from 28% by the CBRT) and 23.7% for the end of 2027 (down from 15%). The longer-term forecast is described as a passive mean reversion, with limited conviction in the prospects for disinflation.

In terms of interest rates, market participants anticipate the repo rate to remain at 37.0% for now, but decrease to around 35% by year-end, representing a 500 basis points easing from the current effective 40% rate. Market participants display more optimism than Commerzbank regarding the USD/TRY exchange rate for year-end (market forecast: 51.66; Commerzbank: 53.0), but this optimism has been tempered by the one-year-ahead forecast, which now aligns with Commerzbank's own estimate of 56.0. Overall, the market's confidence in disinflation or a stable exchange rate is lacking.