Inflation rebound clouds Turkey’s disinflation drive, rate cuts at risk

ANKARA –Turkey's central bank is expected to revise upwards its 2026 inflation forecasts this week and possibly slow or even halt rate cuts in coming months, which analysts say would be another hitch in its easing cycle after prices soared again in January.

Some state officials and analysts say the central bank can either slow the interest rate cuts that began more than a year ago or accept a slower rate of disinflation.

Most expect a bit of both, setting the stage for what could be the latest setback in a more than 2-1/2 year effort to cool inflation and repair years of policy missteps that sparked a lingering cost-of-living crisis.

Vice President Cevdet Yilmaz said on Saturday that Turkey's tight and disciplined monetary and fiscal policies were vital but "not enough", adding that supply-side policies could also help to tame annual inflation that had risen as high as 75 percent before sliding to around 30 percent last month.

The first test comes on Thursday with the release of the central bank's quarterly inflation report, when analysts expect Governor Fatih Karahan to lift its year-end annual forecast from a range of 13-19 percent to possibly as high as 23 percent, the median estimate in a Reuters poll on January 28.

Karahan could even nudge the bank's interim end-2026 target up from 16 percent - though that move is less certain, given the target is meant to remain largely fixed in order to guide policy expectations, the analysts say.

Last month, consumer price inflation surged nearly 5 percent month-on-month, which was higher than expected and driven by food, beverages and new-year price adjustments.

Though it is expected to dip to 3 percent this month, the high monthly readings threaten to derail the yearly forecasts, pushing further onto the horizon past pledges by President Recep Tayyip Erdogan and other officials that "single-digit" annual inflation was coming soon.

"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."

Monetary policy easing has zig-zagged since the central bank first cut its key interest rate from 50 percent in late 2024.

Nearly a year ago it briefly reversed course due to political turmoil, and has since slashed rates by 300 basis points, then 250, 100, 150, and again by 100 points to 37 percent last month.

Having already slowed its easing, the central bank warned last month about risks to the disinflation process and said it would tighten policy if there were a "significant deviation in inflation outlook from the interim targets."

Some analysts predict the central bank may need to pause the cuts, possibly as soon as its next rate decision in March, in order to avoid this deviation.

Wall Street bank JPMorgan raised its year-end CPI forecast to 24 percent from 23 percent and predicted a series of 100-point cuts this year, with the chance of a smaller easing in March due to restaurant and food price pressure during the Muslim holy month of Ramadan.