Interest Rate Cut Coming? Economist Weighs In on What to Expect from the Central Bank in September

With inflation easing and market dynamics shifting, the Central Bank of Turkey (TCMB) is back in the spotlight. Economist Assoc. Prof. Filiz Eryılmaz has shared her latest insights on where interest rates are headed — and her forecast suggests a significant policy move may be on the horizon in the Central Bank’s September meeting.

Inflation Surprises to the Downside

The key driver behind the growing interest rate cut expectations is July’s inflation data, which came in well below market forecasts. According to the Turkish Statistical Institute (TÜİK), the Consumer Price Index (CPI) rose just 2.06% month-on-month in July, pushing the annual inflation rate down to 33.52%. This marks the third consecutive month of inflation printing below expectations.

Eryılmaz attributes this trend mainly to a slowdown in domestic demand and seasonal sales, especially in the clothing and footwear category, which saw prices fall by nearly 5.82%. Despite some skepticism about TÜİK’s methods, many sector insiders reportedly view the decline as reasonable given current economic conditions.

She also highlighted a drop in unprocessed food prices, though processed food inflation remains persistent. This imbalance, she noted, needs careful attention moving forward.

The Core Inflation Picture and Services Sector Pressures

Eryılmaz pointed out that core inflation — which excludes volatile items and administratively controlled prices — remained relatively flat in July. Even after accounting for tax hikes and regulated price increases (which she calls “polluted” data), the underlying monthly trend stayed under 2%. This indicates some cooling in price momentum once these artificial factors are stripped away.

However, not all components are cooperating. Rents and housing costs remain sticky, pushing up the services group inflation. In July alone, housing inflation rose by 5.78%, driven in part by natural gas price increases. According to Eryılmaz, these categories continue to exert upward pressure on the inflation basket.

Education, Restaurants, and Healthcare Show Strong Annual Gains

Looking at annual data, sectors like education, restaurants and hotels, and healthcare are showing the steepest price increases. Education led the pack with a jaw-dropping 75.54% annual rise, followed by housing at 62% and the broader services group at 48.5%. These areas, she warned, will remain inflationary hotspots despite headline improvements.

Stock Market Rally Fueled by Rate Cut Hopes

Markets have responded favorably to the cooling inflation numbers. The BIST 100 Index climbed past the 10,750 threshold, reaching an intraday high of 10,926 before closing at 10,853. According to Eryılmaz, this rally is not random — it’s largely driven by expectations that the Central Bank will start cutting rates in the near term, most likely in September.

Rate Cut Projections Moving Higher

Before the inflation data was released, markets were anticipating a 250–300 basis point rate cut in September. But following the more favorable CPI reading, that expectation has shifted upward to 300–350 basis points, with some even projecting a cut larger than that.

Additionally, Eryılmaz noted that year-end inflation forecasts were being revised downward, with the possibility that inflation could fall below 29.5% by December. This would open the door for interest rates to decline below 35%, down from current levels.

What to Watch Before the September Decision

Looking ahead, Eryılmaz believes a 300 basis point cut is the most likely scenario for the Central Bank’s September meeting — though she emphasizes that August inflation data will be a critical input to solidify that view. She also warned that “dollarization” — the tendency of citizens and businesses to shift toward holding foreign currencies — remains a key risk.

The Central Bank, she said, needs to consider not just inflation but also this growing preference for hard currency. Maintaining positive real interest rates (where rates exceed inflation) will be important in keeping confidence anchored and supporting lira stability.

Final Take

After a year of aggressive tightening, the winds may be shifting. Falling inflation, declining domestic demand, and softening price trends across key sectors are creating space for Turkey’s Central Bank to ease rates — possibly starting as soon as next month. But as always in Turkey’s economy, uncertainty looms large. Markets, policymakers, and consumers alike will be watching the next inflation print — and the Central Bank’s tone — very closely.

Source: CUMHURIYET.COM.TR