Central Bank lifts 2026 inflation forecast to 26 percent

ISTANBUL

The Turkish Central Bank has raised its year-end inflation forecast for 2026 to 26 percent, citing the impact of the war in the region, higher energy prices and increased uncertainty over the global outlook.

Presenting the bank’s second inflation report of the year, Governor Fatih Karahan said the recent geopolitical shock had weighed on the disinflation process but would not alter the bank’s commitment to price stability.

“The war and the uncertainty it has created have negatively affected the disinflation process, but this will not change our determination to achieve price stability,” Karahan said.

The Central Bank expects inflation to fall to 15 percent at the end of 2027 and 9 percent at the end of 2028 before stabilizing at the medium-term target of 5 percent.

Karahan said the bank also revised its interim targets upward to 24 percent for 2026, 15 percent for 2027 and 9 percent for 2028, citing extraordinary updates to assumptions after the geopolitical shock.

The bank also changed its communication framework, saying it would pause the use of forecast ranges in the current high-uncertainty environment and instead share point forecasts under its baseline scenario along with key risks.

Karahan said the war that began at the end of February had pushed up oil, natural gas and other commodity prices, with the effects quickly reflected in energy and transport services prices.

“The main question before us is how long the tension in the region and the pressure on energy supply will continue,” he said, adding that short-term inflationary effects were expected to remain alive.

Annual consumer inflation stood at 32.4 percent in April. Karahan said inflation had fallen significantly from its May 2024 peak but remained high.

Energy inflation, which had been slowing, rose by 19 percentage points in the past two months to 47 percent, led by oil and natural gas prices, he said.

Electricity and natural gas tariffs were updated after the rise in costs, while the introduction of a gradual pricing system for residential natural gas led to a marked increase in prices, Karahan said.

He added that the fuel tax adjustment mechanism limited the pass-through from oil prices to inflation, although its effect varied depending on the level of oil prices and refinery margins.

Food prices also contributed to inflation in the first months of the year, particularly because of volatility in fresh fruit and vegetable prices after adverse weather conditions.

Karahan said early indicators pointed to price declines in vegetables in May as supply conditions normalized, which could support food inflation in the coming months.

Despite pressure from energy and food, inflation continued to decline in services and core goods thanks to tight monetary policy, he said.

Karahan said rent and education prices, which had kept services inflation high in 2025, were now showing signs of easing. He said newly published rent indicators pointed to a downward trend, while changes in education price-setting rules could weaken backward indexation.

The governor said inflation expectations had not declined as much as desired and remained above the bank’s forecasts, making possible second-round effects from geopolitical developments an important risk.

Karahan said the Central Bank cut its policy rate by 100 basis points to 37 percent in January but kept its tight policy stance in March and April after the rise in uncertainty.

To strengthen the monetary stance, the bank suspended one-week repo auctions from March 1 and met liquidity needs through upper-band funding, lifting the reference rate in money markets to around 40 percent, he said.

The bank also used foreign exchange against Turkish Lira swap auctions, macroprudential measures and active liquidity management to support the monetary transmission mechanism.

Karahan said Türkiye’s gross reserves, which had fallen to $155 billion on March 27 because of geopolitical developments, rose by $17 billion to $172 billion by May 8. Net reserves excluding swaps increased by $20 billion to $39 billion.

The governor said demand conditions remained at disinflationary levels in the first quarter, while the current account deficit continued to stay below its long-term average as a share of national income despite pressure from higher energy imports.

He said global growth was expected to lose momentum in 2026, leading to weaker external demand for Türkiye.

Karahan said the Central Bank would continue to assess risks and their possible impact on expectations with a comprehensive approach.

“We will maintain the tight monetary policy stance until price stability is achieved in line with our interim targets,” he said.