Turkish central bank ups year-end inflation target, warns of war risks

Turkey’s central bank increased its inflation targets for 2026, 2027, and 2028 on May 14, 2026, citing prolonged inflationary pressures from the Iran war. Governor Fatih Karahan announced the end-2026 target was raised to 24% from 16%, while the 2027 and 2028 targets were adjusted to 15% and 9%, respectively. The bank kept its key interest rate at 37% for the second consecutive meeting, despite expectations of tighter policy due to war-related disruptions. Karahan highlighted that regional tensions and energy supply risks would sustain short-term inflation, emphasizing the bank’s commitment to reducing inflation using all available tools. He noted the closure of the Strait of Hormuz poses a global energy supply threat, alongside a slowdown in global economic activity and rising input costs. The bank abandoned its previous ‘forecast band communication’ approach due to heightened uncertainty from the conflict. Inflation in Turkey surged in April, with monthly inflation at 4.18% and annual inflation at 32.37%, driven by a 19-point rise in energy inflation to 47% due to oil and natural gas price spikes. Oil prices reached around $100, up from $70 before the U.S.-Israeli strikes on Iran began two and a half months ago. On the macroeconomic front, exports rose in April despite global trade challenges, particularly to Africa, the EU, and North America, while imports excluding gold and energy declined. The trade deficit narrowed, and the current account deficit-to-GDP ratio remained below historical averages. Karahan acknowledged progress in reducing inflation from over 40% at the start of 2025 to 30.65% in January, though levels remain high.