Turkey's Inflation Resurgence and the CBRT's Tightrope Walk: Assessing the Path to Rate Cuts

Turkey's inflation resurgence in 2025 has placed the Central Bank of the Republic of Turkey (CBRT) in a delicate balancing act. With annual inflation surging to 33.29% in September 2025-well above market expectations-the CBRT faces mounting pressure to recalibrate its monetary policy while navigating persistent inflationary pressures, as Reuters reported. The central bank's recent decision to cut the policy rate (one-week repo auction rate) by 250 basis points to 40.5% in September 2025, following a 300-basis-point reduction in July, underscores its commitment to a gradual easing cycle, according to the CBRT statement. However, the path forward remains fraught with risks, as inflation expectations, global energy prices, and domestic demand dynamics complicate the disinflation process.

The CBRT's Dual Mandate: Price Stability vs. Economic Growth

The CBRT's 2025 monetary policy framework emphasizes maintaining a tight stance until price stability is achieved, with a medium-term inflation target of 5%, as the turkiyetoday piece noted. This approach reflects the central bank's prioritization of credibility over short-term growth, a strategy echoed in the Federal Reserve review. Yet, Turkey's inflation resurgence-driven by a depreciating lira, sticky services inflation, and elevated food prices-has forced the CBRT to adopt a more nuanced stance. Reuters reported that the CBRT has signaled a willingness to slow the pace of rate cuts if inflation dynamics warrant a more cautious approach.

The central bank's forward guidance, articulated in its June 2025 meeting, hints at a potential shift in tone. While the policy rate was held steady at 46% in June, global banks such as JPMorgan and ING anticipate rate cuts starting in July 2025, according to ING. JPMorgan forecasts a 250-basis-point reduction at each subsequent meeting, potentially bringing the policy rate to 36% by year-end. However, these projections hinge on the assumption that inflation will decelerate as expected, a scenario complicated by the OECD's revised 2025 inflation forecast of 33.5%-significantly higher than the government's 28.5% projection reported by Reuters.

Key Drivers of Inflation and Policy Challenges

The CBRT's disinflationary efforts face headwinds from multiple fronts. A 12% depreciation of the Turkish lira against the U.S. dollar in the third quarter of 2025 has exacerbated import costs, particularly for energy and food, which together account for over 40% of the CPI basket, according to a BBVA Türkiye report. Additionally, household inflation expectations remain stubbornly high, with surveys indicating that consumers anticipate annual inflation to remain above 30% through 2026, as the BBVA Türkiye analysis shows. These expectations risk becoming self-fulfilling, as they influence pricing behavior across sectors.

The CBRT's policy toolkit includes macroprudential measures and foreign exchange liquidity interventions, but these tools have limited efficacy in addressing structural inflationary pressures. For instance, the central bank's March 2025 tightening of the overnight lending rate to 46% and its subsequent liquidity measures failed to curb inflation, which remained above 30% through August, as previously reported. This highlights the challenge of reconciling monetary tightening with the need to support a fragile domestic economy, where GDP growth is projected to contract to 3.3% in 2025, according to market analysis.

Forward Guidance and the Road Ahead

The CBRT's forward guidance for 2025-2027 outlines a data-driven approach to rate adjustments, with eight pre-announced Monetary Policy Committee (MPC) meetings scheduled to assess inflation trends, as noted earlier. The central bank has emphasized that future rate cuts will depend on the trajectory of inflation, domestic demand, and the lira's real appreciation. However, the risk of a premature easing cycle remains, as evidenced by Bank of America's forecast of seven 250-basis-point cuts in 2025, which assumes a continued disinflationary trend-a point highlighted in BBVA Türkiye's commentary.

Critically, the CBRT's ability to engineer a soft landing will depend on its capacity to anchor inflation expectations. BBVA Türkiye notes that upward revisions to inflation forecasts-driven by currency depreciation and global supply shocks-have increased uncertainty about the disinflation path. If inflation expectations remain unanchored, the CBRT may be forced to maintain a tighter policy stance for longer, delaying the anticipated rate cuts.

Conclusion: A Delicate Balancing Act

Turkey's inflation resurgence in 2025 has exposed the CBRT's struggle to balance price stability with economic growth. While the central bank's recent rate cuts signal a shift toward easing, the risks of premature normalization remain high. Investors should closely monitor the CBRT's MPC meetings and inflation data for clues about the timing and magnitude of future rate adjustments. A successful disinflationary path will require not only monetary discipline but also structural reforms to address the root causes of inflation, including energy dependency and weak domestic demand.