Karahan: Geopolitical risks weigh on Turkey's disinflation
Central Bank of Türkiye Governor Fatih Karahan presented the 2026-II Inflation Report, highlighting that geopolitical developments, particularly the U.S./Israel-Iran war, have introduced significant uncertainty and inflationary pressures. He emphasized the central bank's commitment to price stability despite these global dynamics.
Global uncertainty and energy shocks
Governor Karahan noted that global dynamics, particularly the U.S./Israel-Iran war, have created an unexpectedly severe environment of uncertainty, impacting energy and transportation service prices and consequently global inflation.
The closure of the Strait of Hormuz poses a risk to global energy supply, with crude oil and natural gas prices remaining well above pre-war levels.
While global expectations lean towards short-term tensions, the potential for secondary effects on inflation is being closely monitored.
This environment has delayed interest rate cuts in advanced economies, with some markets even reflecting the possibility of rate hikes.
The CBRT assesses that related inflationary effects will remain pronounced in the short term, necessitating a data-driven and prudent monetary policy approach.
Domestic demand rebalancing continues
Domestically, Türkiye's tight monetary policy continues to rebalance demand composition.
Consumption's contribution to growth in 2025 significantly receded, while investments continued to contribute.
Industrial production remained relatively flat in Q4 2025 and Q1 2026, though services production saw a rise in Q1. The labor market shows a headline unemployment rate below its historical average, but broader indicators suggest less tightness.
Retail sales, excluding gold, showed growth but trend-adjusted data indicates a slowdown, confirmed by subdued card spending.
These indicators collectively point to disinflationary demand conditions in the first quarter, a trend expected to persist for the remainder of the year.
Exports increased in April, while imports declined, narrowing the trade deficit.
Inflation's precarious path
Türkiye's annual consumer inflation stood at 32.4 percent in April, a significant fall from its May 2024 peak but still high.
The Middle East tensions triggered negative supply shocks, driving annual energy inflation up by 19 points to 47 percent.
While the sliding scale system for fuel prices limited some impact, the course of global refinery margins introduces further uncertainty for diesel prices.
The CBRT's unwavering commitment to price stability, despite severe external shocks, underscores the difficulty of anchoring expectations in a volatile global landscape.
While timely measures have been taken, the persistence of geopolitical tensions and their second-round effects will test the limits of data-driven policy.
The path to disinflation remains precarious, demanding sustained vigilance beyond current policy adjustments.