Turkish central bank remains constructive on inflation outlook

Turkish Central Bank Governor Fatih Karahan held a meeting to introduce the first inflation report of the year and shared the latest inflation forecasts, while market participants questioned whether there would be any change in the target and forecasts following a miss in the January figure.

Compared to the previous report, the bank has kept inflation targets unchanged for this year and next at 16% and 9%, respectively, and has introduced an 8% target for 2028. The Governor emphasised that these interim targets represent specific inflation levels that the CBT is committed to achieving in the short term as part of its broader disinflation strategy, and that they will not be adjusted unless extraordinary circumstances arise.

On the other hand, the CBT hiked the forecast range for this year to 15-21% (with a mid-point of 19%) from 13-19% previously. For next year, the forecast range was 6-12% (9% mid-point). The forecasts are now closer to – but still more optimistic than – those of market participants, whose latest survey puts 2026 inflation expectations at 23.23%. This figure is likely to rise further in the February survey following the January inflation print.

According to the report, the key factor behind this adjustment was the increase in the weight of the services group within the consumer price index basket, following recent methodological changes to the CPI calculation. The CBT estimated approximately 1ppt to the annual inflation projection. In addition, despite lower assumptions for oil and energy prices (oil down to US$60.9 from US$62.4 vs ING forecast of US$56.5), the upward revision to TRY‑denominated import price assumptions driven by rising non‑energy commodity prices has contributed to higher inflation estimates.

A limited adjustment to the food price assumption (from 18% to 19%, which is quite optimistic given the current level of 31.7% in January) has also exerted upward pressure on the forecast. Moreover, the output gap remaining at higher-than-anticipated levels has also played a role in the updated forecasts.

Regarding the outlook, the governor sounded quite positive, citing:

• Significant improvement in rent inflation (the bank sees it dropping to the 30-36% range this year from 56.6% in January).
• A contribution from education to the impact of the latest regulations targeting to reduce backward indexation.
• A moderate increase in core goods driven by the current pace of the exchange rate.
• Declining inflation expectations, which are more evident in the corporate sector, supporting pricing behaviour.

While reiterating the impact of food in January CPI, pushing the annual figure towards the upper band of the forecast range in the previous report, the governor has again warned of further pressure in February CPI due to rising food prices, likely due to the upcoming Ramadan effect. However, he pointed out that median inflation, one of the key underlying inflation indicators, continues its moderate course and a further gradual slowdown in non-food inflation after January data.

Beyond February, Governor Karahan sees underlying inflation in March and April converging to levels realised in November and December, implying an improvement despite growing concerns in the market for the 2026 inflation outlook.

Regarding the policy implications of this backdrop, he added that the bank would maintain a tight and prudent stance, determine the policy rate in a way to ensure the tightness required by the projected disinflation path, and maintain a meeting-by-meeting approach in the adjustment of the policy rate with a data-driven approach. This stance would support the disinflation process via moderation in domestic demand, the real appreciation of the Turkish lira and the improvement in inflation expectations.

From our perspective, the relatively favourable assessment of the inflation outlook implies a continuation of gradual rate cuts ahead, despite signals of inflation pressure and further divergence from the CBT’s unchanged target with the January release.

Rising pricing pressures and recovery in demand conditions have prompted the CBT to be more cautious regarding a slowdown in the rate-cutting pace last month, and the governor sees a higher threshold to increase the pace of cuts at the March meeting. This can be translated as a possibility of another 100bp cut next month, while a temporary pause should not be ruled out. We see the CBT reducing the policy rate to 28% with risks to the upside.