A NEW ERA IN CENTRAL BANKING:
FROM FORWARD GUIDANCE TO A DATA-DRIVEN APPROACH
While growth in the global economy maintains its resilient course, stickiness in inflation and geopolitical risks are steering central banks away from forward guidance toward a more data-driven and flexible policy stance. In Turkey, meanwhile, the disinflation process, tight monetary policy, and interest rate cut expectations for the final part of the year constitute the main agenda of the economy and financial markets.
Gözde İLTER ÇAĞIL
Founder & Strategist
İlter Financial Consultancy Inc.
While global leading indicators point to growth maintaining its resilient course, strong momentum in the technology sector balances the pressure of war on economic activity. Global growth around 3% in 2026 remains the baseline scenario. While the effects of the war are felt more pronounced in fragile emerging economies, artificial intelligence is supporting the growth of developed countries. Global disinflation, however, has stalled. Despite a slight retreat in price increases in the US, inflation and inflation expectations remain clearly above the Fed's 2% target. Meanwhile, the acceleration of price increases in items linked to artificial intelligence increases concerns that strong tech demand could keep inflation high. The simultaneous pressure of energy and food prices, tariffs, and tech demand makes it difficult for central banks to view these effects as temporary, bringing the possibility of additional tightening onto the agenda. In the Eurozone, while the energy shock weighs on growth, persistent inflation keeps the possibility of additional ECB rate hikes alive. In China, despite strong exports, weak domestic demand limits growth, while policy support relies on liquidity and structural tools.
While Fed members assess that artificial intelligence investments could increase price pressures in the short term and provide productivity in the long term, views defending a tighter stance within the Fed are gaining ground. Weakening employment growth and rising layoffs in the US have made the slowdown in the labor market pronounced. Although the drop in gasoline prices and improvements in the economic outlook support consumer sentiment, sentiment remains below last year. Concerns regarding the employment impact of artificial intelligence persist. A policy approach less reliant on forward guidance and more sensitive to data is coming to the forefront in global central banks. While this shift increases policy flexibility, it also brings the risks of communication uncertainty and a delayed response to inflation. In this context, signals regarding the Fed's new policy approach will be closely monitored.
GLOBAL FINANCIAL MARKETS: RISK APPETITE RESILIENT DESPITE FED UNCERTAINTY
While US-Iran diplomacy, weakening US employment, and decreasing Fed rate hike pressure support risk appetite in global markets; Fed communication, high borrowing needs, geopolitical risks, and a high term premium can keep bond yields and market volatility high. The dollar may trade neutrally in the near term with weak employment and the possibility of the Fed remaining on hold; potential rate hikes could provide support in the medium term. Upward risks to inflation and the term premium in the US indicate that 10-year bond yields may remain high despite weakening employment. Although the sustainability of artificial intelligence investments and increasing competition are questioned in US equities, strong balance sheets and a robust demand outlook support the S&P 500 despite high valuations, geopolitical risks, and potential Fed tightening. In gold, while the outlook is supported by declining oil prices pulling down inflation and interest rate expectations, a recovery in central bank purchases, and continuing ETF inflows, the broad-based expansion of demand points to the continuation of the upward trend. Conversely, the Fed shifting toward a more hawkish stance and 2026 central bank purchases remaining below last year stand out as the main risks that could limit the upward movement.
TURKISH ECONOMY: WEAKENING DOMESTIC DEMAND SUPPORTS DISINFLATION
While the weak outlook in the manufacturing industry continues in the Turkish economy, PMI data shows that the sector has remained in contraction territory for over two years, and weak demand and the decline in new orders continue to suppress production. 2026 growth forecasts are around 3%, in parallel with the global outlook. While the loss of momentum in the services sector, tight credit conditions, and the slowdown in domestic demand support disinflation, improvements in core indicators and annual inflation continue. However, stickiness in services inflation, energy costs, and the gradual removal of the tax buffer on fuel keep upward risks alive, with year-end inflation expectations around 30%. While persistence in price pressures and geopolitical risks support the CBRT's cautious stance, slower-than-expected progress in disinflation indicates that interest rates may remain high for a longer period. Conversely, a decrease in geopolitical tensions and a retreat in energy prices could create a limited room for easing starting from the autumn.
While the weakening in core imports in leading foreign trade data also points to the slowdown in domestic demand, the rise in energy prices poses a risk to the external balance. The ratio of the current account deficit to GDP has risen above 2%, and if oil prices remain at current levels, it is expected to reach approximately 3% by the end of the year; this ratio remains below the 20-year average of 3.6%. The recovery in reserves and the real return advantage of the TL support foreign investor demand, providing a buffer for the exchange rate and external financing outlook. The budget deficit to GDP ratio dropped from 2.9% to below 2.5% in 2025 with the contribution of revenue growth and a decrease in non-interest expenditures, while fiscal discipline proceeds in line with the Medium-Term Program (MVP) targets.
DOMESTIC FINANCIAL MARKETS: RATE CUT EXPECTATIONS SUPPORT TL ASSETS
The recovery in reserves, foreign capital inflows, and households not turning to foreign currency support the TL. The course of disinflation, oil prices, the current account balance, and the CBRT's rate-cut path will determine the pace of depreciation in the TL. While it is important for the CBRT to observe disinflation and the external balance together, cautious rate cuts, a positive real interest rate, and permanent disinflation will be decisive for exchange rate stability.
The decline in inflation and oil prices opens up room for the CBRT to cut interest rates towards the end of the year and may support foreign interest in TL bonds. If disinflation and foreign inflows continue, a gradual decline in bond yields is expected, and the supportive effect of rate cuts on medium-term bonds could be more pronounced. Deterioration in the outlook for inflation, exchange rates, or fiscal policy could limit this trend. The tight policy stance, recovery in reserves, and decreasing external financing need support the decline in the risk premium, while attractive return levels increase interest in Eurobonds. The outlook for domestic equities is cautiously positive. While disinflation, rate cut expectations, attractive valuations, and low foreign positioning support the index; oil prices, resilient inflation, and political uncertainty are the main risks. Positive progress regarding market operations in the November MSCI review could increase foreign interest.
Disclaimer Note: The assessments and views included in this article are of a general nature and do not fall within the scope of investment consultancy.
This content has been translated using artificial intelligence technology.