Introduction to Turkey’s Economic Recovery
The year 2026 has begun on a positive note for Turkish markets, with inflation for 2025 coming in at a lower rate than expected, marking a drop of over 13 percentage points from the 44.38% level recorded at the end of 2024. This decline in inflation is a significant development, indicating that the country is moving in the right direction.
Factors Contributing to Economic Recovery
Several key factors have contributed to this trend. The increase rate for taxes and fees in 2026 was initially announced as 25.49%, but it was instead implemented at 18.95%. This reduction in taxes and fees is expected to help keep price hikes in check, which could lead to more moderate inflation figures in the first two months of the year. Additionally, the Central Bank of Turkey (CBRT) reduced its policy rate to 38% by the end of 2025, which is also expected to support the economy.
Impact of Interest Rate Cuts
The CBRT’s decision to cut interest rates is significant, as it can help stimulate economic growth. However, the bank may wait for January and February inflation figures before deciding on further moves. The last rate cut came in December, with a 150 basis-point reduction, and there remains a roughly 7-point gap between the policy rate and annual inflation, suggesting that tight monetary policy is still in place.
Credit Rating Agencies’ Assessments
Credit rating agencies are also set to release their first assessments of Turkey in January. Fitch Ratings will issue its first 2026 review on January 23, and Moody’s is expected to publish its assessment on the same day. These assessments will be closely watched, as they can impact investor confidence and the country’s ability to attract foreign investment.
Improved Economic Health
A separate note is warranted on Turkey’s credit default swap (CDS), a measure of the country’s default risk. Last week, Turkey’s CDS dropped to 204, the lowest level in seven years. This decline in CDS signals improved "economic health" and "financial stability." Lower risk premiums also help increase foreign investors’ appetite for exposure to that country. In fact, foreign investors became net buyers on Borsa Istanbul in 2025, with net purchases totaling around $2.2 billion.
Market Performance
The Borsa Istanbul BIST 100 index closed the first trading day of 2026 with a strong 2.10% gain at 11,498 points, the sharpest daily increase since October 24. Weekly performance also reached a high, bringing the index close to its 11,605 peak. The banking index (XBANK) outperformed the overall market last week with a 6.40% gain — a move likely supported by the fall in Turkey’s CDS.
Conclusion
In conclusion, 2026 begins with more optimistic expectations for Turkey. The decline in inflation, reduction in taxes and fees, and interest rate cuts are all positive developments that can help stimulate economic growth. The improved economic health and financial stability, as indicated by the decline in CDS, are also expected to increase foreign investors’ appetite for exposure to the country. As the year progresses, it will be important to monitor the country’s economic performance and the impact of these developments on the overall economy.
