Türkiye's Central Bank has raised its year-end inflation forecast for 2026 to 29.5%, citing geopolitical tensions, rising energy costs and persistent supply-side pressures, while reiterating its commitment to maintaining a tight monetary policy until price stability is achieved.

Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan announced the revised projection on Thursday during the presentation of the bank's fourth Inflation Report of 2026 in Istanbul.

The bank expects annual inflation to decline to 21% by the end of 2027, 13.5% by the end of 2028 and 9% by the end of 2029, before converging toward its medium-term target of 5%.

Karahan said the upward revision reflected the prolonged impact of geopolitical developments, particularly disruptions to energy supplies and higher-than-anticipated oil and natural gas prices.

The bank also revised its assumptions for import prices and food inflation upward, citing increased energy and transportation costs, as well as developments in agricultural commodity markets.

"The disinflation process continues, although it has lost momentum," Karahan said, emphasizing that the central bank would maintain its cautious monetary policy stance.

Inflation pressures and economic outlook

Annual consumer inflation stood at 29.8% in October, according to the governor, while underlying inflation indicators continued to improve.

Karahan said annual inflation in the energy group reached 51.4% in October, driven by rising fuel, natural gas, bottled gas and coal prices.

In contrast, annual services inflation declined to 36.6%, while core goods inflation remained relatively subdued.

The governor noted that energy prices had increased by 43% since February, compared with a more limited 17% rise in underlying inflation.

He warned that although the indirect effects of higher energy costs had so far remained relatively contained, they could intensify if elevated energy prices persisted.

Karahan also pointed to food prices as another source of uncertainty, noting that rising vegetable prices continued to exert pressure on inflation.

Economic growth slows as domestic demand weakens

Türkiye's economy expanded by 2.3% year-on-year in the second quarter of 2026, reflecting a slowdown in economic activity.

Karahan said final domestic demand had lost significant momentum, while net exports made a positive contribution to annual growth.

Industrial production declined in the third quarter following a strong increase in the previous quarter, while services production continued to expand as of August.

The governor said indicators of retail sales and credit card spending pointed to weakening domestic demand, adding that demand conditions were now at levels supportive of disinflation.

He also noted that capacity utilization remained below its historical average, while broader labor market indicators suggested some easing in employment conditions.

Despite geopolitical challenges, Türkiye's exports performed well in the second and third quarters. However, rising energy prices contributed to a widening trade deficit in October.

Tourism revenues also remained strong, with higher average spending by visitors offsetting a slight decline in visitor numbers during the January-September period.

Central bank maintains tight monetary policy

Karahan reiterated that monetary policy would remain tight to ensure the continuation of disinflation and bring inflation down in line with the bank's interim targets.

The central bank reduced its policy rate by 100 basis points to 36% at its October Monetary Policy Committee meeting.

The weighted average cost of funding declined by a total of 400 basis points following the resumption of one-week repo auctions in August and the October rate cut.

Karahan said the central bank had also introduced liquidity and macroprudential measures to address financial market volatility and support the functioning of monetary transmission mechanisms.

He added that total loan growth had slowed from 35% at the end of February to around 20%, reflecting the impact of tighter monetary conditions and regulatory measures.

Meanwhile, gross international reserves declined from $210 billion on Feb. 27 to $161 billion on Nov. 6, with $28 billion of the decrease attributed to falling gold prices.

Net reserves excluding swaps fell by $50.4 billion over the same period to $28 billion.

Geopolitical risks remain a major concern

The governor warned that geopolitical tensions, volatile commodity prices and disruptions to global supply chains continued to pose significant risks to Türkiye's inflation outlook.

He said uncertainty surrounding energy shipments through the Strait of Hormuz had pushed oil prices higher, while disruptions to natural gas supplies and increased transportation costs had also raised import prices.

Karahan added that the global growth outlook remained relatively resilient despite geopolitical tensions, partly due to strong investment in artificial intelligence technologies.

However, Türkiye's external demand outlook continued to face challenges because of its strong trade links with the conflict-affected region.

The central bank expects external demand to remain weak in 2026 before recovering slightly in 2027.

Concluding his remarks, Karahan stressed that price stability remained essential for sustainable economic growth and improved social welfare.

He said the central bank would decisively maintain its tight monetary policy until price stability was achieved in line with its revised interim targets. (ILKHA)