Turkish Central Bank Puts All Policy Options On The Table

Fatih Karahan, Governor of the Central Bank of the Republic of Turkey presented the year's second Inflation Report today, unveiling updated projections at a time when market participants had been questioning whether escalating geopolitical tensions, particularly the recent US–Iran conflict, would prompt revisions to official targets.

Compared with the previous report, several notable changes stand out.

First, the CBT significantly adjusted its inflation targets upwards, citing“extraordinary revisions to the assumptions due to extraordinary geopolitical developments." Forecasts for end-2026, 2027, and 2028 were revised from 16%, 9%, and 8% to 24%, 15%, and 9%, respectively. This shift and the elevated path for inflation both for this year and for 2027 signal that the Bank considers the inflationary effects of tensions in the Middle East to be more persistent than previously anticipated.

Second, the CBT moved away from presenting an inflation range to providing point estimates. Under this new approach, year-end inflation for 2026 is projected at 26% (vs 15-21% in the previous report with a mid-point of 18%), slightly exceeding the updated target. Projections for 2027 and 2028 align with the revised medium-term targets. The upward revision reflects several key drivers: the direct and indirect impact of higher energy prices, based on an average oil price assumption of USD 89.4 per barrel for 2026 and USD 75.4 for 2027; higher assumptions for Turkish lira-denominated import prices (a 6.3% rise in 2026 followed by a marginal 0.2% decline in 2027); an upward revision to food inflation expectations, now expected at 26.3% for this year following recent data; and a stronger-than-anticipated underlying inflation trend compared with earlier projections.

While the revised forecast brings the CBT's outlook closer to market expectations, it remains relatively optimistic. According to the April survey, market participants anticipated inflation of 27.53% for 2026, a figure that is likely to rise further in the May survey following a higher-than-expected increase in the most recent inflation data.

Third, in its communication strategy, the CBT opted to focus on risks to the inflation outlook rather than presenting a forecast band. The Bank argued that in periods marked by supply shocks, structural breaks, and elevated uncertainty, traditional forecast bands, typically derived from historical volatility, are insufficient to capture current and future risks. In this context, the CBT emphasised that upside risks dominate. These include the possibility of prolonged high oil and natural gas prices depending on the trajectory of the conflict, further increases in food prices driven by war-related factors, stronger inflation persistence, and potential supply chain disruptions.

Regarding the policy implications, Governor Karahan highlighted two primary sources of uncertainty: the magnitude and duration of the Middle East–related shock, and the extent to which slowing economic growth may help moderate inflation. The Bank acknowledged that recent indicators point to a deceleration in economic activity. While the Governor said the current policy stance remains appropriate – reflecting tighter policy for longer than previously envisaged following recent geopolitical developments - he stressed that all policy options remain on the table.

This stance underscores a preference for maintaining policy flexibility in the face of evolving geopolitical conditions. Accordingly, a rate hike remains a possibility, particularly if pressures on foreign exchange reserves intensify or retail FX demand shows renewed strength. At the same time, the Governor signalled reluctance to pursue a significant widening of the upper bound of the interest rate corridor to create a more asymmetrical framework. Such a move could further push up domestic lending rates, which are sensitive to the upper bound, and thereby increase financial pressures on local corporates.

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