CBRT Outlook: Geopolitical Risks, Rising Inflation Targets, and the Credibility Gap
Bottom Line: Persistent structural domestic headwinds and geopolitical volatility make the Central Bank of Turkiye’s (CBRT) inflation targets increasingly unattainable, risking a further erosion of institutional credibility. While the CBRT has recently revised its 2026 midpoint target upward (now at 18%), market scepticism remains high due to sticky service pricing and energy shocks linked to the Iran conflict. We expect the disinflation process will be very bumpy due to inflationary risks and we believe it will be (very) difficult to grind stubborn inflation from 30%s to 10%s in the medium term, making the CBRT’s single-digit goal for 2028 appear unlikely.
Figure 1: CPI, Core Inflation (YoY, % Change) and Policy Rate (%), January 2015 – April 2026
Source: Continuum Economics
The Central Bank of the Republic of Turkiye (CBRT) has frequently missed its inflation targets in recent years, leading to a pattern of consistent upward revisions. Over the past 15 months, this trend has been clearly visible in the bank’s shifting projections. In its First Inflation Report of 2025 (February), the CBRT raised its year-end inflation forecast from 21% to 26%. The regulator then introduced a broader uncertainty range of 25%–29% in the Third Inflation Report (August 2025) to account for volatile energy prices and stubborn service sector inflation.
This trend has persisted into early 2026. In its most recent report, the CBRT acknowledged that structural factors—specifically changes in inflation basket weights and sticky service pricing—necessitated further adjustments. Consequently, the year-end 2026 forecast was raised from the previous 13%–19% range to a new band of 15%–21%, with the midpoint target edging up from 16% to 18%. Despite these adjustments, market scepticism remains high. We think CBRT's 18% target is optimistic given the ongoing war in Iran, which has spiked global energy and fertilizer costs. (Note: Unless the conflict subsides, we assess CBRT will likely raise its midpoint target to approximately 20% in the upcoming May 2026 Inflation Report to reflect inflationary pressures).
We believe changing targets often and missing them affects CBRT’s credibility negatively. Taking into account that sustained economic recovery hinges on the independence of the CBRT and rule-of-law reforms, we think any backsliding could easily trigger market volatility. There is some domestic criticism about the credibility of the CBRT since inflation continues to significantly deviate from the CBRT’s targets, CBRT changes inflation targets frequently and CBRT’s decisions are partly controlled by the current government, particularly in the last five years, causing CBRT’s forward communication to be weak and discredited.
We continue to envisage that it will be difficult to bring down sticky inflation from the 30% range to the 10% range rapidly, especially as inflation has become more entrenched and requires interest rates to remain high for some time. It appears necessary to make concessions on growth to achieve inflation in the low teens. Key factors will be domestic dynamics and global developments. We anticipate that domestic risks will keep inflationary pressures alive for longer, making it unlikely to reach single-digit inflation by 2028, despite CBRT’s expectations. (Note: These pressures could be partly relieved once the Iran conflict loses momentum, the geopolitical risk premium dissipates, and oil prices realign with market dynamics).
Given the CBRT's 5% medium-term inflation target, it appears adverse geopolitical developments, sticky domestic inflation and hikes in oil and gas prices after U.S./Israel attacks to Iran would likely trigger CBRT to navigate interest-rate adjustments with caution, adopting a meeting-by-meeting approach while reaching 5% inflation-target will be hard in the medium term.