War-driven energy costs push inflation outlook higher

ANKARA

War-related increases in energy costs and higher food prices have pushed the Central Bank’s end-2026 inflation forecast to 28 percent, though Governor Fatih Karahan said the revision did not reflect a deterioration in the underlying inflation trend.

In its third Inflation Report of the year, published on Aug. 13, the bank raised the forecast from 26 percent.

It kept its projections for 2027 and 2028 unchanged at 15 percent and 9 percent, respectively.

The bank attributed the revision to stronger-than-expected increases in diesel, natural gas and other commodity prices.

A higher food inflation assumption, changes to the sliding-scale fuel tax system and adjustments to administered prices also contributed.

Energy prices remain markedly above pre-war levels after regional tensions escalated again in July, the report said.

Karahan said disinflation was continuing despite a loss of momentum and that the worst of the war-related risks appeared to be over. Oil and natural gas prices nevertheless remained among the main upside risks, he added.

He also said a return to one-week repo auctions, the bank’s standard funding instrument, was on the agenda, with the timing to depend on market conditions. Karahan cautioned that such a step should not be read as a signal about future interest-rate decisions.

The policy rate remains at 37 percent, but one-week repo auctions have been suspended since March 2 and the weighted average funding cost has remained at the 40 percent overnight lending rate.

The bank retained its interim inflation targets at 24 percent for 2026, 15 percent for 2027 and 9 percent for 2028.