In May, central bank Governor Fatih Karahan held a meeting to introduce the second inflation report of the year and shared the latest inflation forecasts after the volatility in late March. Without any meaningful revision to those presented in the previous report, the CBT kept the inflation forecast unchanged at 24%, 12% and 8% for this year, 2026, and 2027, respectively. Approaching the year-end, though the forecast range corresponding to 2025 should have narrowed down mechanically, the bank kept it between 19% and 29%, citing “the recent rise in uncertainties”. The bank does not perceive inflation as being rigid, and expects seasonally adjusted monthly inflation to ease to just above 1% by year-end (down from the current level of over 2.5%). However, the balance of risks remains tilted to the upside.
According to the report, this year’s inflation outlook reflects several upward pressures: a 0.5ppt impact from higher food inflation assumptions, a 0.3ppt upward revision in the output gap, a slightly stronger underlying inflation trend (+0.1 ppt), and a 0.1ppt increase from exchange rate effects on TRY-denominated import prices – despite lower USD import price assumptions. These were largely offset by a 1ppt downward revision in administered prices, driven by February’s reduction in health examination co-payments.
Given this background, the CBT’s governor pointed out that the central bank’s policies have prevented a serious deterioration in the inflation outlook. 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 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 in the Turkish lira and the improvement in inflation expectations.