Türkiye | Disinflation Progress, Caution Required

Summary

Consumer prices rose by 0.9% in Dec, leading its annual inflation to fall to 30.9% by end 2025. Lower than expected Dec figure and supportive early year tax adjustments create room for a similar 150bps rate cut in January; however, the persistent stickiness in inflation trend and expectations requires to remain cautious.

Key points

• Key points:
• Headline consumer inflation remained subdued (<1% m/m) in December, supported by seasonally low core inflation and weaker energy prices. However, our estimates show seasonally adjusted CPI edging up to 1.6% m/m, driven by services and food. Persistent inertia in services inflation and limited improvement in core goods—despite lower currency depreciation—suggest continued stickiness in core inflation (1.9% m/m sa core B; 2.0% core C).
• The average of six inflation trend indicators improved only marginally in December (1.8% m/m vs. 1.94% in November). That said, median inflation (1.64% m/m) - which the Central Bank closely monitors and uses as a justification in its decisions - and the inflation distribution showed more favorable readings.
• Lower tax rates relative to PPI—particularly on fuel, alcohol, and tobacco in 1H26—and certain administered price adjustments aligned with the CBRT’s 19% upper forecast bound may help anchor expectations and partly offset pressure from the 27% minimum wage hike. Still, uncertainty remains over upcoming CPI methodology changes.
• Inflation expectations stay well above the CBRT’s 16% median and 19% upper bound of the forecast range for end 2026 despite the December’s improvement. Services inflation still signals robust inertia and easing financial conditions have already started to support demand.
• Lower than expected Dec CPI together with additional downside risk to our January forecast (potentially below 4%) —assuming no negative food surprise— creates room for a similar 150bps rate cut in January. We will closely watch the revisions in CPI index and the effectiveness of the policy mix going forward and evaluate the balance of risks on our already above consensus 25% year end inflation forecast.

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