Iran war exerts cost-push pressure on inflation, says Turkish Central Bank governor

ANKARA

The governor of the Turkish Central Bank said ongoing tensions in the Middle East have driven a sharp rise in energy prices, adding cost-push pressure on inflation and indirectly affecting prices across sectors.

In the medium term, the war is expected to have further side effects on inflation; cost- and supply-side disruptions already creating additional pressures, Fatih Karahan told state-run Anadolu Agency.

Highlighting the bank's measures to limit the war's impact on the inflation outlook, Karahan said: "We are determined to ensure the tightness required for the continuation of the disinflation process."

“Our analyses indicate that a permanent 10 percent increase in oil prices adds approximately 1.1 percentage points to consumer inflation over a year,” said Karahan. He, however, noted that the implementation of the sliding-scale system significantly mitigates the spillover of this impact to consumer prices. “According to our calculations, the sliding-scale system reduces the impact of oil prices on inflation to one-third,” he noted.

Karahan said the rising energy costs, external uncertainties, and the resulting potential weakening of external demand are expected to create a downward pressure on economic activity.

“Our analyses suggest that a 10 percent supply-side increase in oil prices leads to a 0.4-to-0.7 percentage points of decline in the growth rate over a one-year period,” he explained.

He also noted that recent developments will affect the current account balance diversely through energy and non-energy items.

“Our analyses show that a $10 increase in oil prices deteriorates the one-year net energy balance by approximately three-to-four billion dollars. In case of a parallel rise in natural gas import prices as well, this impact may go up to 5 billion dollars,” said Karahan.

At present, the level of the current account deficit is below its historical average, he said, adding that: “We think that the possible deterioration of the current account balance amid recent developments will be manageable.”

He also said that as of March 2026, the share of gold reserves in total reserves exceeded 60 percent. “Therefore, it is very natural to use gold-based transactions when FX liquidity needs to be supported,” Karahan added.

Swap is one of the most commonly used instruments in liquidity management, and they too manage the financial system’s liquidity by using different kinds of swap transactions, he also said.

“Via location swap transactions, we use domestic gold in international markets. Likewise, we have been reinforcing our foreign exchange liquidity by the recent FX/Gold swap transactions that we have been carrying out,” he said. “Recently, we have used some part of our gold for FX/Gold swaps. Apart from that, we have sold some gold as well.”

“The transactions that we have been conducting in this scope are intended to reinforce our foreign exchange position. Moreover, most part of these transactions are in the form of Gold/FX swaps, which means this gold will return to our reserves at the end of the maturity,” said Karahan.

“Besides gold, we can conduct Turkish Lira-Currency Swap transactions with banks as well,” he added.

“Recently, the foreign exchange liquidity in the banking system has increased due to the decline in swap transactions conducted with foreign institutions, while the need for Turkish lira funding has increased. Banks have started to demand swap transactions with the Central Bank again. And today, we resumed Turkish lira-Currency Swap transactions,” he said.

“The fact that banks have started to demand swap transactions with the Central Bank again shows that there is no foreign currency liquidity squeeze in the system and that the exchange rate regime that we have been implementing is on the right track,” Karahan added.