Turkey inflation forecast nears markets after 28% revision

Turkey inflation forecast rose to 28% as the central bank moved closer to market estimates and admitted prices stayed above target.

Governor Fatih Karahan announced the revised year-end projection at a presentation in Istanbul on Thursday. The new estimate is up from the bank’s previous 26% call and sits just below the 29% annual price increase expected by markets in a central bank survey last month.

Karahan attributed the upgrade to geopolitical uncertainty linked to the conflict and to volatility in oil, gas and food prices. For a country that imports much of its oil, higher global energy costs add pressure to domestic prices through fuel, transport and production costs.

Karahan lifts the price call

The governor paired the higher forecast with an unusually direct assessment of the bank’s own record. "On the one hand, the fact that inflation was kept in check at 75% and later brought down to the 30s is a success," Karahan said, referring to Turkey’s disinflation process.

He added that inflation remaining above the bank’s targets "stands out as a partial failure." The comment matters because Turkey’s monetary authority has been trying to rebuild credibility after years of high inflation and shifting policy settings.

The central bank kept its inflation target at 24%, separate from the 28% forecast and used as a guide for the interest-rate path. That leaves the bank’s official target below both its own projection and the 29% market expectation reported in last month’s survey.

Demand slows across spending channels

Karahan said policymakers had seen softer consumer demand across credit-card spending and retail sales. Slower demand can help disinflation by reducing the ability of companies to pass higher import and energy costs into final prices.

Annual baseline price increases cooled modestly for two consecutive months to 31.8% in July, according to the presentation. The figure remains above the central bank’s year-end forecast, leaving the next several monthly readings central to whether the 28% path can hold.

The governor also pointed to global energy conditions as a continuing constraint. "There is a very serious global price rise driven by energy supply issues," Karahan said, linking the external shock to the bank’s higher forecast.

Funding stays at 40%

The monetary authority will continue, for now, to fund the market through its more expensive overnight rate of 40%, Karahan said. That rate is 3 percentage points, or 300 basis points, above the 37% one-week repo policy rate.

The bank suspended lending through the main repo rate after the war broke out in late February, creating a de facto tightening in financial conditions. Karahan said "a return to one-week repo is on the agenda," while adding that the timing would depend on future market conditions.

The rate structure gives the central bank room to keep liquidity tight without formally changing the headline policy rate. It also means banks and borrowers remain exposed to funding costs above the published benchmark while uncertainty persists.

Oil, rates and price paths

If energy and food volatility eases while domestic demand continues to cool, Turkey’s disinflation path would have a clearer mechanism: weaker consumption and lower imported cost pressure. That scenario would support the central bank’s credibility, reduce pressure on banks’ funding costs and give global investors a cleaner read on Turkey’s real-rate outlook.

If oil, gas and food prices rise again, the opposite channel becomes harder for policymakers. Imported inflation would lift company costs, the central bank would face pressure to keep overnight funding at 40%, and sectors with high fuel or logistics exposure would have less room to absorb price increases.

A third path depends on whether the central bank returns to the 37% repo rate before inflation data move closer to target. If that shift comes while price growth is still near the low 30s, markets may test whether the move is an easing signal; if it comes after clearer monthly improvement, it would look more like a normalization of funding operations.

The main open question is whether July’s cooling in baseline price increases extends through the rest of the year. For Turkey, the answer will shape the gap between the 24% target, the 28% central bank forecast and the market’s 29% expectation.