Turkey's monetary authorities are preparing to lift forecasts for inflation and potentially curb the pace of interest-rate reductions after consumer prices accelerated again in January, reintroducing uncertainty into an easing cycle that began more than a year ago.
State officials and private-sector analysts say the central bank can either decelerate its sequence of rate cuts or concede a slower path of disinflation. The prevailing view is that the bank will do a bit of both, setting up what could be the latest obstacle in an effort lasting more than two and a half years to lower inflation and correct prior policy errors that contributed to a persistent cost-of-living squeeze.
Vice President Cevdet Yilmaz emphasized on Saturday that maintaining tight and disciplined monetary and fiscal policies remains crucial but acknowledged those measures alone may not be sufficient. He added that supply-side measures could play a role in reducing annual inflation, which at its peak reached 75% before falling to around 30% last month.
Lifting forecasts and possibly the target
The central bank's quarterly inflation report, due on Thursday, will be the first test of whether policymakers adjust official expectations. Analysts expect Governor Fatih Karahan to raise the year-end annual inflation forecast from its prior 13-19% range to as much as 23% - the median estimate from a Reuters poll published on January 28.
There is also the possibility that Karahan might slightly raise the bank's interim end-2026 target from 16%, although analysts see that step as less certain because the target is generally intended to remain relatively fixed to anchor policy expectations.
Consumer price inflation surged by nearly 5% month-on-month in January, a larger increase than anticipated and one driven by food, beverages and price adjustments tied to the new year. While a decline to 3% month-on-month is expected this month, the recent run of high monthly readings risks undermining the annual projections and pushing the timeline for achieving pledged single-digit inflation further into the future.
"These figures once again highlight the difficulty of executing disinflation in Turkey, given the accumulated cost of past policy choices," said Hilmi Yavas, an Istanbul-based independent economic strategist. "To stay in touch with reality the central bank ought to revise the forecasts."
Rate path: slow, pause or continue?
Monetary policy easing has followed a zig-zag pattern since the central bank first cut its policy rate from 50% in late 2024. Nearly a year ago the bank briefly reversed course amid political turmoil, and subsequently implemented a sequence of reductions totaling 900 basis points in several moves - 300, then 250, 100, 150, and again by 100 points - bringing the policy rate to 37% last month.
After already slowing the pace of easing, the central bank cautioned last month about risks to the disinflation process and said it would consider tightening policy if there were a "significant deviation in inflation outlook from the interim targets." Some analysts have suggested the bank may need to pause further cuts, potentially as soon as its next policy decision in March, to avoid such a deviation.
On the forecasting front, Wall Street bank JPMorgan adjusted its year-end consumer price index prediction to 24% from 23% and projected a series of 100-point rate reductions this year, while noting the possibility of a smaller cut in March because restaurant and food prices could be pressured during the Muslim holy month of Ramadan.
For now, policymakers face the immediate task of reconciling strong monthly inflation prints with prior commitments to reduce inflation. The quarterly report and the coming rate decisions will clarify whether the central bank opts to lift its forecasts, slow the pace of easing, pause cuts altogether, or use a combination of those measures to respond to the recent price uptick.