The Turkish central bank (CBT) now expects inflation to get down to 28% at the end of 2025. They point to some ongoing stresses that are still roiling the economy. This achievement is certainly unprecedented in the world, but it still has a cost. Overall, it has gone up to a new high of 31% to 33%, from the prior 25% to 29% range. This is a critical change that recognizes effort meets the challenge. These challenges are compounded by high food inflation, changing capital flows, geopolitical tensions and persistently high service prices.
Governor Karahan noted a number of reasons for this rosy upward revision. He noted that extreme drought has dramatically stressed food costs, an important driver of total inflation. The impact of capital flows and current geopolitical tensions have further complicated the inflation narrative.
Karahan pointed to other inflation expectation challenges that stifle the upside. He noted that the stickiness of service prices is the key factor in the upward revision to the forecast. The interaction of these factors adds up to a much tougher environment for bringing inflation back to stable levels in the short run.
In this environment, Finance Minister Mehmet Simsek has offered a ray of hope. For one, he noted that all the basis for concern over headline consumer price index (CPI) inflation has completely subsided. The annual rate now stands at 32.9% as of October. Simsek stated, “The ministry foresees the disinflation trend continuing, anchored by restrictive monetary settings, a supportive but disciplined fiscal stance, prudent pricing of administered tariffs and supply-side actions.”
Backing down from its previously announced goal, the central bank recently changed its 2025 target. It has not adjusted its 2026 projections, maintaining an optimistic range of 13% to 19%. Commerzbank’s FX analyst Tatha Ghose noted that projections for future years have remained constant, indicating a cautious outlook amid fluctuating economic conditions.
In short, the Turkish economy has a complex and intertwined challenge of taming inflationary pressures while battling outside uncertainties. The central bank is leaning into these complexities and recalibrating as appropriate. Indeed, it is commendable that it is taking a proactive approach to try to steer monetary policy through this rapidly developing environment.