Türkiye is closing out a year in which it appears to have largely pulled off what looked like a risky balancing act: keeping monetary policy tight long enough to break stubborn inflation without tipping the economy into recession.
After years of runaway price growth, annual inflation established a steady downward trend in 2025. Starting the year above 42%, headline inflation is heading into 2026 at just over 30%, the lowest level the country has seen since late 2021.
Authorities are not anticipated to dramatically reduce broader inflation-fighting policies in 2026. That framework has been in place since mid-2023, when policymakers sharply hiked interest rates before shifting to gradual cuts as of the end of 2024.
Data from October and November showed disinflation is back on track after summer price pressure. And the Central Bank of the Republic of Türkiye (CBRT) cited "signs of improvement" in pricing behavior and expectations when it delivered a larger-than-expected 150 basis-point interest rate cut at its final Monetary Policy Committee (MPC) meeting of the year on Dec. 11.
Headline inflation eased to nearly 31.1% in November, from 32.9% in October, driven mainly by a slowdown in food prices. However, sticky prices in sectors like housing and education remain a challenge.
The central bank's end-2025 interim inflation target stood at 24%, with a forecast range of 31%-33%.
What appears to be encouraging for authorities is that inflation expectations, although still high, have been declining among market participants, businesses and households.
Government officials have said they expect inflation to fall into the 20% range in early 2026.
A critical test for the downward trend arrives in the first quarter: a 27% increase in the minimum wage. The hike is higher than the government's 2026 inflation target and slightly exceeds analyst expectations, potentially creating new upward pressure on prices.
The central bank expects inflation to fall to its 16% interim target by the end of 2026, with a projected range of 13%-19%.
Treasury and Finance Minister Mehmet Şimşek recently said the upper band of the 2026 target remains "highly achievable," provided there are no external shocks.
Şimşek suggested that more supportive global financial conditions, moderate commodity prices, tight monetary and fiscal policy, strengthening financial stability and improving expectations could accelerate disinflation momentum in the new year.
In total, the CBRT shaved 950 basis points off its one-week repo rate in 2025, bringing it down from 47.5% to 38%. The first of eight MPC meetings planned for 2026 is scheduled for Jan. 22.
While the central bank has emphasized that future decisions will remain data-driven and assessed on a meeting-by-meeting basis, it's still widely expected to continue with its easing cycle.
Analysts expect the bank to proceed with gradual 100-150 basis-point cuts if the underlying trend continues to improve. Economists polled by Reuters suggest the key policy rate could be lowered to about 28% by the end of 2026.
Despite the high borrowing costs intended to cool the economy, Türkiye appears to have achieved a "soft landing," with inflation easing and the labor market cooling in an orderly fashion.
What's more, Türkiye's gross domestic product (GDP) is forecast to have overtaken that of Italy in 2025 to make it Europe's fourth largest economy when measured using purchasing power parity (PPP).
That's according to the International Monetary Fund (IMF) projections, which estimate Türkiye's GDP (PPP) at $3.77 trillion, while Italy's is roughly $3.72 trillion. That will also make it the 11th largest in the world ranking.
The IMF data also estimated that the Turkish economy has become the 16th largest in the world in 2025, with a GDP of roughly $1.57 trillion.
Growth in the emerging market economy slowed but remained resilient in 2025.
GDP expanded by a lower-than-expected 3.7% year-over-year in the July-September period, while the seasonally adjusted quarterly pace held at a solid 1.1%, defying expectations of a sharp slowdown.
That marked a deceleration compared to the revised 4.9% growth in the second quarter. The expansion for the first nine months of the year stood at 3.7%.
Analysts at ING and BBVA Research say leading indicators point to a revival in demand and an acceleration in activity in the final quarter. Officials expect full-year growth for 2025 to come in at around 3.7%.
The government's medium-term program forecasts growth of 3.8% in 2026 and 4.3% in 2027.
In the labor market, the unemployment rate has remained in single digits for more than two-and-a-half years.
Although the rate edged up slightly to 8.6% in November, the government's program envisions it remaining below 8.5% through 2027 before dropping to 7.8% in 2028.
Two additional factors helped ease concerns about the state of the Turkish economy in 2025.
The first was the reserve accumulation drive, which saw the central bank aggressively rebuild its foreign exchange buffers.
Türkiye's total gross reserves neared a record $200 billion in mid-October, compared to approximately $158 billion at the beginning of the year. They last stood at $192.3 billion in the week ending Dec. 19.
The second factor has been a stabilization trend in the country's external balance.
The latest data showed Türkiye recorded a current account surplus for the fourth consecutive month in October, mainly supported by robust tourism and transportation revenues and relatively stable energy prices.
The cumulative deficit in the first 10 months stood at $14.5 billion, while the 12-month rolling gap totaled $22 billion, or approximately 1.6% of GDP. The government's medium-term program estimates that the rate will end 2025 at 1.4%, before gradually narrowing to 1% through 2028.
