TCMB's Karahan Upgrades 2026 Inflation Forecast to 28% Amid Geopolitical Tensions

Central Bank of the Republic of Türkiye (TCMB) Governor Fatih Karahan delivered a sobering outlook at the Inflation Report presentation held in the Istanbul Finance Center, signaling that the battle against inflation will be prolonged and that the tight monetary stance will be maintained with resolve. Citing cost pressures from geopolitical tensions and upward trends in food prices, Karahan announced an upward revision of the year-end inflation forecast for 2026 to 28%.

Energy and Food Costs Drive Forecast Higher

Karahan stated that the global growth outlook has weakened under geopolitical risks, noting that this has constrained external demand assumptions. He emphasized that data from the energy and food sectors specifically indicates a bumpier trajectory for inflation than previously anticipated.

■The year-end 2026 inflation forecast was raised to 28% (a 2-point update).

■The forecast for 2027 remains at 15%, while 2028 is projected at 9%.

■Oil and import prices: The decline following the ceasefire was replaced by a resurgence, and upward revisions to oil price assumptions for 2027 have elevated risks.

■Food and Energy: Diesel refinery margins, natural gas prices, and supply shocks in the unprocessed food group were cited as primary factors in the upward revision of forecasts.

■Tax Adjustments: The impact of regulations regarding the tax exemption mechanism was also reflected in the projections.

Unwavering Tight Stance Until Price Stability

The Governor noted that maintaining the tightness in financial conditions will keep domestic demand weak; however, supply-side shocks have slowed the disinflation process's impact on headline inflation. Karahan strongly emphasized that price stability is a prerequisite for sustainable growth and that there will be no deviation from the determined stance in policy rates until this target is achieved.

■Domestic demand: Demand conditions have been confirmed to remain at disinflationary levels due to tight monetary policy.

■Services inflation: A weakening tendency to index past inflation is expected to make declines in service items more pronounced.

■Policy stance: Policy will be shaped by considering the medium-term inflation outlook alongside short-term fluctuations.

Global Uncertainty and Supply Shocks

Karahan highlighted that uncertainties persist globally regarding the course of the war, noting that the Fed's abandonment of forward guidance and the Bank of Japan's (BoJ) steps are determining global risk appetite. He observed that portfolio flows towards emerging markets remain volatile.

■Global growth: Loss of momentum is expected in 2026, with a recovery projected for 2027.

■Supply chain: Input and freight costs remain high, and the halt in transit through the Strait of Hormuz keeps risks alive.

■Flows: Outflows from emerging market equity markets and inflows into bond markets are being observed.

Markets reacted to this development by repricing rate cut expectations, particularly for the second half of the year. The upward movement in year-end risk premiums in the swap market suggests that HFT algorithms are coding the revised forecasts as a signal for a longer period of high interest rates, despite Karahan's emphasis on the "tight stance." This upward deviation in the 2026 path has increased uncertainty regarding policy decisions in the near term.