NEWS

Turkey's annual inflation rate slowed more than expected in July 2025, providing support for the Central Bank’s recent decision to resume interest rate cuts. This marks a pivotal moment for Turkish monetary policy amid ongoing efforts to stabilize the economy and control price growth.

According to data released by the Turkish Statistical Institute (TurkStat) on Monday, consumer prices rose by 33.5% year-on-year in July, down from 35.05% in June. Economists had forecast an average rate of 34.05%, with estimates ranging between 33.8% and 34.4%.

Meanwhile, the Turkish lira edged lower against the U.S. dollar, weakening by 0.15% to trade at 40.67 lira per dollar. This modest depreciation highlights ongoing market concerns surrounding monetary policy direction and inflationary pressures.

Markets React as Central Bank Eyes Further Easing

The inflation slowdown is likely to encourage the Central Bank of the Republic of Turkey (CBRT) to continue easing monetary policy. Following its July move to lower the benchmark interest rate from 46% to 43%—the first cut since March—the bank may implement another rate cut in September if inflation continues to decline.

Hande Şekercioğlu, Chief Economist at Is Asset Management, said the data will help ease pressure on the central bank, noting that apparel prices fell more sharply than expected, providing room for policy flexibility.

Following the release, Turkish equities rose as much as 1.1%, led by a rally in banking stocks—often seen as beneficiaries of lower interest rates.

Monthly Inflation Rises on Taxes and Energy Costs

Despite the annual moderation, monthly inflation climbed to 2.06% in July from 1.37% in June. The increase was driven by a series of tax hikes affecting products like tobacco and fuel, along with rising energy prices. Analysts had expected a monthly inflation rate of 2.4%.

Yasemin Başyigit, economist at Turkiye Ekonomi Bankasi (TEB), noted that food prices increased by just 0.07%, well below expectations of 1%, helping to offset the impact of other price hikes.

Structural Pressures Remain: Housing and Education Costs

While the overall inflation figure suggests progress, structural challenges persist, especially in housing and education—two sectors less responsive to interest rate adjustments.

Housing prices jumped 5.8% month-on-month, making it the largest contributor to monthly inflation. Başyigit noted that service inflation, particularly rents, continues to rise but shows signs of slowing on an annual basis.

These figures highlight the complexity of Turkey’s inflation problem and the limited reach of monetary tools in addressing supply-side and regulatory-driven price increases.

Upcoming Central Bank Meeting Critical for Outlook

The next key event for investors is the Central Bank’s Quarterly Inflation Report meeting on August 14, where Governor Fatih Karahan is expected to unveil updated forecasts and the policy path for the remainder of 2025.

The central bank had initially begun its rate-cutting cycle in December but paused it in March amid political turmoil following the imprisonment of Istanbul's mayor. Foreign investors exited Turkish assets in response, prompting the CBRT to hike rates before resuming cuts in July.

As always, the CBRT is expected to base its next decisions on a combination of actual inflation data, forward-looking expectations, and seasonally adjusted price indices.

Insight from Point Trader Group

According to analysts at Point Trader Group, the recent inflation drop offers a short-term reprieve but does not eliminate long-term structural risks. While interest rate cuts may support economic growth, lasting stability will require a coordinated policy approach that combines monetary easing with fiscal discipline and institutional reforms.

The group highlights that Turkey's inflation path will remain volatile due to global commodity prices, geopolitical uncertainty, and domestic consumption trends—all factors that investors and policymakers must monitor closely.