Selva Demiralp, an Economics Professor at Koç University, stated that Turkey's inflation outlook is currently blocking the central bank from easing interest rates. This comes even as the country has shown surprisingly resilient economic growth.
Demiralp's insights follow recent data indicating a divergence in inflation expectations. While market participants showed a decrease in their inflation forecasts for August, businesses and households saw their expectations rise, according to a survey by Turkey's Central Bank. The central bank itself revised its year-end 2026 inflation forecast to 28%, with market participants projecting 29.2% for the same period.
Despite an emergency interest-rate hike by the central bank in March 2025, Turkey's economy grew 4.8% annually in the second quarter of 2025, exceeding the median estimate of 4.1%. However, the central bank's hands are seen as tied, with potential political pressures leading to an easing bias even without strong economic justification, as Demiralp noted in June 2026.
In July 2026, Turkey's annual inflation eased for a second consecutive month to 31.75%, down from 32.1% in June, and below the Bloomberg survey's median estimate of 31.9%. Yet, persistently high energy prices, exacerbated by the Iran war, continue to pose a significant challenge to the central bank's year-end inflation forecast. Market participants also forecast the repo rate to decline only gradually, to around 35% by year-end 2026 from an effective 40% currently.
