Fatih Karahan, governor of the Central Bank of the Republic of Türkiye, spoke at a meeting held at the Central Bank of the Republic of Türkiye campus in Istanbul Financial Center to introduce the third Inflation Report of the year. Karahan announced that the 2026 year-end inflation forecast had been raised by 2 percentage points to 28%.
Reasons for the inflation forecast update
Karahan said the outlook for diesel, natural gas and non-energy commodity prices had influenced the change in the forecasts. He added that regulations concerning the sliding-scale fuel tax mechanism, the increase in the food inflation assumption, and administered or directed prices had also been reflected in the update.
The CBRT governor said they expected year-end inflation to decline to 15% in 2027 and to 9% at the end of 2028. He noted that inflation was expected to stabilize at 5% over the medium term.
Oil and import price assumptions
Karahan announced that external demand assumptions for 2026 had been revised slightly downward. Saying that oil prices had been revised downward due to actual developments, Karahan added that they had maintained the assumption that prices would decline gradually during the year.
Karahan said the oil price assumptions for 2027 had been revised upward depending on the course of the war. He added that the 2026 import price assumptions had been raised somewhat because of diesel refining margins, natural gas and some other commodity prices. He stated that the 2027 import price assumption had been lowered because of the base effect.
Emphasis on a tight monetary policy
Karahan said the forecasts had been prepared on the basis of an outlook in which a tight monetary policy stance was maintained and coordination among economic policies continued. He said they expected domestic demand to remain weak as tight financial conditions persisted.
Karahan said the decline in services inflation would become more pronounced as the tendency to index service items to past inflation weakened. He added that they expected tight monetary policy to support improvements in inflation expectations and pricing behavior.
Karahan said supply-side shocks caused by geopolitical developments had adversely affected the disinflation process, but core goods inflation had remained at low levels. He stated that the tight monetary policy stance would be maintained resolutely until price stability was achieved.
Energy prices among the most important risks
The CBRT governor said the possibility that oil and natural gas prices could remain high for longer, depending on the course of the war and the ceasefire, was among the most important upside risks. He added that potential increases in diesel prices stemming from refining margins continued to pose a risk to energy prices.
Karahan said oil prices could remain below the baseline assumptions if developments concerning the ceasefire followed a more positive course, adding that this could have a downward effect on inflation.
Karahan said geopolitical risks had temporarily eased after the agreement reached between the United States and Iran in June, while risks later showed a volatile pattern because of developments related to the course of the war and the possibility of a new agreement.
Global growth outlook weakens
Karahan said expectations for the global growth outlook had remained weak due to the impact of geopolitical developments. He added that global growth was expected to lose momentum in 2026 and recover somewhat in 2027 with the contribution of the base effect.
Karahan said vessel traffic through the Strait of Hormuz had increased for a while after the agreement, then declined again and nearly came to a halt. He added that oil and natural gas prices had remained high and volatile. He noted that energy and non-energy commodity prices staying above pre-war levels had also increased import prices.
Karahan said fluctuations in global energy prices continued to affect inflation and inflation expectations. He added that portfolio flows to emerging markets had also been volatile because of geopolitical uncertainty.
Domestic demand weakens
Karahan said growth had continued to slow in the first quarter and that current data showed demand conditions remained at disinflationary levels. He added that growth had recovered somewhat in the second quarter with the contribution of external demand despite weak private consumption.
Karahan said industrial production had increased, also supported by the strong performance of exports, while services production had declined month-on-month in April and May. He noted that although the capacity utilization rate in manufacturing rose slightly in the second quarter, it remained below its historical average and declined somewhat in July.
Karahan said the unemployment rate had remained well below its historical averages. He added that broad-based indicators pointed to a less tight labor market, while the rate of underutilized labor and the number of applications per job posting remained high.
Exports increased in the second quarter
Karahan said growth in retail sales excluding gold had remained below the previous quarter and that the loss of momentum in demand had continued. He added that the decline in card spending in the second quarter also confirmed the slowdown in demand.
Karahan said exports had increased in the second quarter despite challenges in global trade and geopolitical conditions. He assessed that geopolitical developments and rising logistics costs had partly shifted demand toward Türkiye, contributing to the increase.
Karahan said the decline in exports to Middle Eastern countries had been partly offset, adding that exports to African, European Union and North American countries had increased. He said the increase in imports had remained relatively limited, while energy imports had risen because of high prices and imports excluding gold and energy had declined.
Karahan said these developments had led to a decline in the foreign trade deficit in the second quarter compared with the first quarter. He added that preliminary data for July also pointed to an outlook below the levels recorded in the previous quarter.
