Markets were waiting with curiosity: Increase in Central Bank's inflation forecast

The Central Bank of the Republic of Turkey has published its first Inflation Report regarding 2026. TCMB Governor Fatih Karahan, who presented the report, made evaluations regarding both the inflation outlook and the monetary policy framework.

Drawing attention to the rigidity in the services group, Karahan said, "We find it significant that the inertia in some service items, such as rent, which has shown resistance for a long time, is showing signs of breaking in this period. Indeed, this development will be one of the key elements in the future course of the disinflation process. On the other hand, the recent past has shown again that both domestic and global dynamics carry effects and risks that can vary depending on developments in terms of the course of inflation. This reveals the importance of our cautious monetary policy stance, which we are maintaining with a data-driven approach. Therefore, I would like to emphasize that we are ready to use all monetary policy tools decisively in the coming period to continue seeing the positive effects of our tight monetary policy on inflation."

INFLATION FORECASTS ANNOUNCED

Regarding the medium-term projections, Karahan said, "We estimate that inflation will be in the range of 15 to 21 percent in 2026. For the end of 2027, our forecasts indicate that inflation will decline to the 6 to 12 percent range. We have maintained our inflation target for 2026 and 2027 at 16 percent and 9 percent, respectively. We have set our intermediate target for 2028 at 8 percent. We foresee that inflation will stabilize at the 5 percent level in the medium term after falling to 8 percent in 2028. In addition to the clarification of certain risks and assumption revisions, the increase in the share of the services group in the basket in the CPI calculation method also played a role in the update of the 2026 forecast range."

Thus, the Central Bank has reaffirmed its disinflation path and intermediate targets for 2026 and beyond to the public.

"WE WILL MAINTAIN A TIGHT MONETARY POLICY"

Giving a message regarding the monetary policy stance, Karahan stated, "We will maintain our tight monetary policy stance to reach our intermediate targets in the disinflation process. Our cautious tight monetary policy stance, which we will maintain until price stability is achieved, will strengthen the disinflation process through demand, exchange rate, and expectation channels. Macroprudential policies that support the monetary transmission mechanism will also contribute to this process. We will continue to determine the policy rate in a way that ensures the monetary tightness brought by disinflation in line with intermediate targets. We will continue to determine the steps to be taken regarding the policy rate and their magnitude with a meeting-based approach, based on the inflation outlook, and in a cautious manner. If the inflation outlook deviates significantly from the intermediate targets, we are ready to tighten our monetary policy stance. We will continue to do whatever is necessary with determination to reduce inflation in line with the intermediate targets we have set."

DOMESTIC DEMAND AND PRODUCTION OUTLOOK

Sharing the latest data on economic activity, Karahan said, "Industrial production followed a flat course in the last quarter. Indicators point to the fact that domestic demand in the fourth quarter, while recovering slightly, is still at moderate levels. Indicators point to the fact that domestic demand in the fourth quarter, while recovering slightly, is still at moderate levels."

COURSE OF INFLATION IN JANUARY

Touching upon the reflections of seasonal effects on prices, Karahan said, "We see an inflation rate approaching the upper band of the range in January; we can say that the effects originating from food prices are in the foreground in this development. Vegetable prices rose significantly as a result of weather conditions that turned negative in January, and this development will also have effects that spill over into February. When we look at the main trend indicators, we see an increase in January due to period-specific factors."

RENT INFLATION AND EXPECTATIONS

Making an evaluation regarding rents, which is one of the important items of the services group, Karahan said, "On the rent side, both seasonally adjusted data and leading indicators for rents, such as retail payment system data, indicate that the main trend is downward. It is estimated that rent inflation could be between 30 and 36 percent by the end of this year under various scenarios. The figures implied by the regulatory change for 2026 show that there is some room for disinflation on the education side. When we look at basic goods, there is a weakened inflation due to the exchange rate channel. The fact that expectations are running above our inflation forecasts shows that risks are alive in terms of the disinflation process. This outlook is one of the elements that makes it necessary to maintain our tight stance in monetary policy."