Governor Fatih Karahan's Speech at the Briefing on Inflation Report 2026-III (İstanbul)
Distinguished Members of the Press, Esteemed Participants,
Welcome to the briefing on the third Inflation Report of 2026.
The geopolitical developments that have stood out this year in the course of the disinflation process have continued to fluctuate since the May Inflation Report. We are proactively monitoring the effects of these developments on the inflation outlook.
In an environment of heightened uncertainty regarding the course of the war, we maintain our firm and prudent stance while shaping our monetary policy with a focus not only on the short term but also on the medium term.
Even though supply-side shocks triggered by geopolitical developments have had a negative impact on the disinflation process, we clearly observe the tightening effects of our monetary policy on demand conditions.
In this context, core goods inflation remained low despite increased costs, inflation inertia in certain services items also weakened, and disinflation continued. We interpret these positive developments in domestic dynamics as an outcome of our decisive policy.
During this period, in which inflation expectations and pricing behavior remain important, we will maintain our tight stance and continue to use all our tools decisively to achieve our primary objective of price stability.
In my presentation, I will first share our assessments of the global economy, the macroeconomic outlook, and the monetary policy. Later on, I will present our medium-term projections. After the presentation, our Deputy Governors and I will be answering your questions.
As usual, our Inflation Report includes boxes on prominent issues on the agenda as well as our thematic analyses.
Following the agreement reached between the US and Iran in June, we observed a temporary easing of geopolitical risks.
In the period that followed, the geopolitical risks exhibited volatility due to the news circulating about the course of the war and the possibility of a new agreement between the parties.
This results in ongoing uncertainty regarding the global economic outlook.
Although global supply conditions have improved slightly, input costs and freight rates remain high, and disruptions in supply chains continue.
Shipping through the Strait of Hormuz, which is of critical importance for the global energy supply, picked up somewhat after the agreement.
However, in the following period, it declined again and came to a near standstill.
Oil prices also converged to pre-war levels immediately after the agreement, but then they went up again.
Currently, oil prices are high and volatile.
Natural gas prices display a similar trend.
Overall, both energy and non-energy commodity prices are high compared to pre-war levels.
Accordingly, import prices have also climbed since the war.
Global growth is expected to lose momentum in 2026.
In 2027, the growth outlook is expected to recover somewhat, supported by base effects.
Meanwhile, depending on how the war unfolds, there are both upside and downside risks to global growth.
Fluctuating energy prices continue to shape global inflation and inflation expectations.
Inflation forecasts, which were revised upward with the outbreak of the war, are still high.
The global inflation outlook may further deteriorate due to secondary effects.
This has also heightened expectations of tighter monetary policy globally.
Portfolio flows to emerging markets also fluctuate due to heightened geopolitical uncertainty.
Recently, there have been outflows from the stock markets and inflows into the bond markets.
We see that uncertainty regarding the interest rate path has increased following the Fed’s decision to end its forward guidance. Moreover, the upcoming steps by the Bank of Japan are significant for global markets.
These developments will also be decisive in global risk appetite and portfolio flows.
ECONOMIC OUTLOOK
Esteemed Guests,
Following the global outlook, now, I would like to share our observations on domestic macroeconomic developments.
We see that growth kept slowing in the first quarter of the year.
In this context, available growth data confirmed that demand conditions have remained at disinflationary levels as a targeted outcome of our tight monetary policy stance.
The outlook for the second quarter, which I will discuss in more detail shortly, suggests that growth recovered somewhat, driven by external demand, despite the weak trend in private consumption.
As for the indicators for the second quarter of the year:
Following a relatively flat course in the final quarter of 2025 and the first quarter of this year, industrial production posted an increase, supported by stronger-than-expected exports. We see a similar trend when excluding highly volatile sectors.
On the other hand, services production declined month-on-month in April and May, while remaining nearly flat on a quarterly basis.
Despite edging up in the second quarter of the year, the manufacturing industry capacity utilization rate remained below its historical average.
In July, it saw a slight decline.
Regarding the labor market, the headline unemployment rate went down in the second quarter.
While the unemployment rate remains well below the historical average, broadly defined indicators point to a less tight labor market.
In fact, the labor underutilization rate and the number of applications per job postings are at high levels.
As for demand conditions, excluding gold, retail sales growth was lower than in the previous quarter.
Meanwhile, trend-adjusted data shows that retail sales continue to lose pace.
Card spending, which fell in the second quarter, also confirms a more pronounced slowdown in demand.
Data for July indicate that the weak trend in card spending continued into the third quarter.
Taken as a whole, indicators show that demand conditions were at disinflationary levels in the second quarter.
The majority and the average of the output gap indicators based on alternative methods point to a negative level also in the second quarter, as has been the case for some time.
We foresee that the disinflationary outlook will be maintained in the remainder of the year.
Regarding economic activity, I would also like to touch upon foreign trade developments.
Despite challenges in global trade and geopolitical conditions, exports increased in the second quarter.
The strong picture in exports is also attributed to the shift of demand partly towards Türkiye due to the geopolitical developments and elevated logistics costs.
While the decline in exports to the Middle East following the outbreak of the war was somewhat offset in this period, exports to Africa, the European Union, and North America increased.
In the same period, imports recorded a relatively lower increase. Although energy imports rose due to high prices, imports excluding gold and energy decreased.
As a result, the trade deficit narrowed in the second quarter compared to the first quarter. Provisional data for July also point to levels below those of the previous quarter.
Looking at imports of consumption goods, we see that the slowdown in passenger car imports played a major role in the decline during the second quarter.
Provisional data for July imply a limited uptick in imports of consumption goods, still it does not seem likely to offset the decline in the first two quarters.
Before moving on to the inflation outlook, I would like to briefly talk about current account balance developments.
In the second quarter, the current account deficit-to-GDP ratio remained below the historical average.
As I have just mentioned, the upsurge in energy prices triggered by war led to a significant increase in energy imports.
Imports of gold, which dropped quarter-on-quarter, limited the increase in the current account deficit.
However, for the remainder of the year, there are upside risks to the current account deficit stemming from increased protectionist measures in international trade, geopolitical developments, and rising energy prices.
Despite all these developments, we expect that the current account deficit-to-GDP ratio will remain below the long-term average in 2026.
Distinguished Participants,
Now, I would like to share with you our current evaluations pertaining to the inflation outlook.
We have experienced a deceleration in the disinflation process in recent months.
Supply-side pressures weakened somewhat compared to the previous reporting period, yet they further slowed the disinflation process.
Against this background, annual consumer inflation stood at 31.8 percent as of July. Core inflation indicators, on the other hand, remained slightly below the headline inflation.
In fact, annual inflation in the C index, which excludes energy and food, stood a little below 30 percent.
Meanwhile, we see that increases in administered prices have been hovering above the CPI for a while. Thus, the F index excluding these items has been lower than headline inflation.
We saw a decline in the underlying inflation in July driven mostly by distribution-based indicators.
These indicators fell more sharply than exclusion-based indicators such as B and C; causing the underlying inflation to be lower than our expectations.
Price developments in broad categories with numerous subcategories such as core goods and processed foods played a significant role in this outcome.
The annualized three-month underlying trend shows that the average of the six indicators we monitor stands around 27 percent.
However, the trend inflation indicator, which by design focuses on longer-term movements and filters out one-off effects, is relatively flat.
A closer look at the two main components of the underlying trend reveals low figures in core goods but a relatively high course in services inflation.
You are all aware of the fact that the initial effects of geopolitical shocks on inflation were visible primarily through sub-categories with strong links to energy and petrochemicals.
Accordingly, we witnessed stronger figures in energy and core goods inflation in the second quarter, which abated somewhat in July.
Another notable factor in recent inflation developments has been food prices.
The first crop production forecasts for 2026 suggest that production, which decreased amid drought and frost last year, rebounded this year, with fruits and cereals in the lead.
This improvement in production exhibits a favorable supply-side outlook for food inflation.
However, despite this overall improvement, the negative divergence in food inflation has become more pronounced.
We present a detailed analysis of the effects of supply conditions and production costs on food prices in a box in our Report.
In this section, we will take a closer look at the leading groups causing a high course in food inflation.
The effect of the improvement in supply conditions on food prices vary among subcategories.
While vegetable production exhibits an overall flat picture, we see differentiations by product. Supply setbacks were seen in some products with high weight in the June-July period, and prices increased significantly.
Milk, meat and associated products have been other notable products with price increases over the last one-year period. We see an acceleration in prices of nonalcoholic beverages in recent months.
Energy prices are volatile due to geopolitical developments.
Increased uncertainties amid geopolitical developments led energy prices to re-increase in July. Leading indicators point that these effects are also carried over into August.
Natural gas and electricity posted the most significant price increases during the war period, while the sliding-scale system limited the rise in fuel prices.
In addition to crude oil prices, the surge in diesel refinery margins also negatively affects fuel prices.
We see the effects of geopolitical developments not only in core goods prices but also in energy prices.
In fact, we partly observed these effects on the recent rise in core goods inflation. For instance, personal care and household cleaning products, which are closely tied to petrochemical products, registered substantial price increases during the geopolitical turbulence.
On the other hand, durable goods inflation remained relatively flat in this period. Thus, standing at 17%, annual core goods inflation continued to be significantly below headline inflation. The slowdown in consumption demand brought about by the tight monetary policy was an important factor that reined in the rise in core goods inflation.
Hence, we have once again seen the importance of tight monetary policy in limiting the impact of recent shocks on inflation.
We see the effects of demand conditions on inflation in the services sector as well.
Despite supply shocks, the deceleration in services inflation continues. Weakening demand contributes to this picture.
Indeed, the fact that annualized three-month underlying inflation is lower than annual inflation indicates a sustained trend of deceleration.
The medical examination copayment regulation in July causing a one-off impact, and the recent surge in fuel prices have pushed services inflation upward through transport services. When these effects are excluded, we see a more evident decline in underlying services inflation.
Rent and education services have a particularly significant role in the slowdown in services inflation.
A look at cumulative inflation over the first seven months of the year reveals that inflation has significantly declined in both items compared to the previous year. This shows that the inertia in services inflation stemming from these items has weakened.
On the rent side, leading indicators such as the new tenant index suggest that the downward trend will also continue in the upcoming period.
As for education services, regulations that base price adjustments on the 12-month inflation rather than past 24 months are an important step in our view. We expect these changes to continue weakening the backward-indexation tendency and support the disinflation process.
In this respect, we will closely monitor the inflationary effects of the developments in the private university fees in August and September.
Meanwhile, we see a different course in transport and communication services.
Due to the rise in fuel prices, transport services posted strong price hikes in the first seven months.
In the recent period, inflation in communication services has also become stronger. These two items hinder the improvement in services inflation.
On the other hand, disinflation continues in services sub-items such as restaurants-hotels, which are relatively more sensitive to demand conditions.
In this period, we also closely monitor the second-round effects that may emerge from the expectation channel. Lastly in this context, I would like to touch upon inflation expectations.
The impact of global developments on inflation expectations varied across sectors. While the expectations of market participants rose compared to the previous reporting period, those of businesses and households fell.
One of the boxes in our report also suggests that weak demand conditions limit the impact of cost increases on inflation expectations.
We will continue to determine the degree of monetary policy tightness so as to ensure that inflation expectations and pricing behavior contribute to the disinflation process.
MONETARY POLICY
Distinguished Participants,
I would now like to give a brief account of our monetary policy stance.
In January 2026, we reduced the policy rate by 100 basis points to 37 percent.
To contain the impact of the war and geopolitical developments prevailing since early March on the inflation outlook, we maintained our tight policy stance and kept the policy rate constant in the following period.
In order to support the tight monetary policy stance, we have not conducted one-week repo auctions since the previous reporting period. We have continued to meet the market’s liquidity need through overnight funding at the upper band.
Mostly excess liquidity conditions were prevalent since the previous reporting period, except for a brief period of liquidity shortage in the market.
During this period, we continued to hold deposit buying and swap auctions to sterilize excess liquidity.
Through our effective liquidity management, we ensure that the interest rates in money markets materialize at nearly 40 percent.
We continue to implement macroprudential measures focused on Turkish lira deposits, loan growth and liquidity management to support our tight monetary stance.
We enforce regulations aiming at increasing the share of Turkish lira deposits through revisions based on financial conditions.
We employ growth limits to manage fluctuations in loan growth.
Deposit and commercial loan rates move in tandem with the weighted average funding cost.
Consumer loan rates, on the other hand, are shaped not only by the weighted average funding cost, but also by macroprudential measures and credit risk developments.
Starting in 2025, the share of the Turkish lira fluctuated due to the precious metal price developments and increasing geopolitical risks.
However, our tight monetary policy stance, along with our supportive macroprudential toolkit, were influential in maintaining residents’ preference for Turkish lira deposits.
Particularly with the acceleration of inflows into Turkish lira deposits as of the second quarter, the share of Turkish lira deposits increased to 62 percent. This outlook stays the same when mutual funds are also included.
Loan growth, which accelerated in the last quarter of 2025, slowed significantly starting from the second quarter of 2026.
In addition to the tight monetary policy stance, steps such as the inclusion of overdraft accounts in growth limits, the lowering of growth limits, and the narrowing of the scope of exempted loans were influential in this slowdown.
As a result, total loan growth has declined from 34.6 percent at end-February to around 25 percent.
The slowdown in credit growth is evident across all segments.
Accordingly, TL commercial and consumer loan growth rates declined to around 35%, while FX credit growth rates fell below 10%.
We assess that, that these developments will support financial stability by improving the credit composition and contribute to the rebalancing of domestic demand.
The short end of the yield curve declined amid growing interest in short-term bonds between the two reporting periods.
Meanwhile there was a slight increase in medium- and long-term maturities.
We contained the deterioration in risk indicators that could have resulted from heightened geopolitical uncertainties through our decisive and proactive policy stance.
Risk premium and exchange rate volatility have improved compared to the previous reporting period and converged towards the levels prevailing before these developments.
Gross reserves, which stood at 155 billion dollars on March 27, 2026, increased by 30 billion dollars, reaching 185 billion dollars on August 12, 2026.
Net reserves excluding swaps rose by 35 billion dollars to 56 billion dollars in the same period.
MEDIUM-TERM PROJECTIONS
Before moving on to the details of our inflation forecasts, I would like to share our main assumptions that underlie our forecasts.
As I stated in the beginning of my speech, expectations regarding the global growth outlook have continued to weaken due to geopolitical developments. Accordingly, we have revised our assumption for external demand slightly downwards for 2026.
Our second revision is about oil and import prices. Based on realizations, we have made a downward revision in our assumption for oil prices, which dropped following the ceasefire but rose again amid subsequent tensions. Although the uncertainty over the unfolding of events persists, we have assumed that oil prices will gradually decrease during 2026. We have revised our assumption for oil prices upwards for 2027 based on the course of the war.
On the other hand, driven by diesel refinery margins, natural gas and commodity prices excluding energy, we have revised our import price assumption for 2026 upwards. Meanwhile, we have adjusted our import price assumption for 2027 downwards due to the base effect.
Additionally, we raised our food price assumptions based on realizations and the outlook for agricultural commodity prices.
We have built our forecasts on the assumption that the tight monetary policy stance will be maintained. Furthermore, we have also factored in the assumption that the coordination among economic policies will continue.
Now, I would like to share our inflation forecasts.
Against this background, we have revised our inflation forecast for the end of 2026 upwards to 28 percent. We project inflation to decline to 15 percent at end-2027, to 9 percent at end-2028 before stabilizing at the medium-term inflation target of 5 percent.
The outlook for diesel, natural gas, and commodity prices excluding energy contributed to the 2-percentage-point revision in the year-end 2026 forecast. We have also factored the impact of the regulations regarding the sliding-scale system into our forecasts. In addition, the upward revision to the food inflation assumption, along with administered prices, also played a role in the upward revision of our inflation forecast.
There has been no significant update to our output gap forecast compared to the previous reporting period. As financial conditions remain tight, we expect the weak trend in domestic demand to continue in the coming period.
Furthermore, we project that the decline in services inflation will become progressively more pronounced as inertia weakens in services items, which exhibit a high tendency of backward-indexation.
As the tight monetary stance supports the improvement in expectations and pricing behavior, we expect the downward trend in underlying inflation to continue in the coming period.
As you may recall, at the briefing in May, we stated that we had adopted a new approach to “communication of forecasts”.
In this context, I would now like to share the risks we consider to be prominent.
Starting with energy prices;
Depending on the course of the war and the ceasefire, oil and natural gas prices remaining elevated for a longer period constitutes one of the main upside risks. In addition, increases in diesel prices driven by refinery margins are keeping upside risks to energy prices alive.
On the other hand, if news flow of the ceasefire becomes more favorable, oil prices may remain below baseline assumptions and exert downward pressure on inflation.
As for the food prices, international agricultural commodity prices, agricultural input prices, climate conditions, and supply developments remain as important as ever. In particular, supply side developments in the unprocessed food group may affect the short-term inflation outlook in both directions.
Besides, I would like to reiterate that the consecutive and more frequent occurrence of different supply-side shocks in recent periods poses risks in terms of pricing behavior and inflation inertia.
As we formulate our monetary policy stance, we will continue to assess the direction of risks and their possible effects on inflation expectations with an integrated approach.
Distinguished Participants,
As I have noted in my speech, uncertainty regarding geopolitical developments and their macroeconomic impacts persists.
The disinflation process continues, although it has lost momentum due in part to these recent developments.
Thanks to our tight monetary policy stance, the weakening in domestic demand has become more pronounced.
Furthermore, while market participants’ expectations have risen somewhat, expectations of the real sector and households have declined.
We observe a clearer slowdown in inflation in categories most directly affected by monetary policy.
However, due to supply-side shocks, the impact of this development on headline inflation has been limited.
As the impact of these shocks subsides, we anticipate that the disinflation process will regain momentum, supported by our tight monetary policy stance.
As I have emphasized on every occasion, price stability is a prerequisite for sustainable growth and improvement in social welfare.
For this reason, I would like to reiterate that we will decisively maintain our tight monetary policy stance until price stability is achieved in line with our interim targets.
As I conclude my remarks, I would like to thank all of my colleagues who have contributed to the writing of the Report, primarily the members of the Monetary Policy Committee, the Chief Economist, the Chief Advisors and the staff of the Research and Monetary Policy Department, and everyone that have contributed to the press conference.
Now, along with our Deputy Governors, we can proceed to the Q&A session.