Turkish central bank lifted its inflation forecast for the end of 2026 to 28% but left its interim inflation target for the same period unchanged at 24%, while pledging to maintain a tight monetary stance, its chief said on Thursday.

Presenting the quarterly inflation report in Istanbul, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan also said that the bank kept its interim inflation target for end-2027 steady at 15% and the interim target for end-2028 stayed at 9%.

"The CBRT will ensure the tightness required by the projected disinflation path in line with the interim targets," Karahan said.

The bank revised its year-end forecast slightly from the earlier forecast of 26%, in line with market expectations, as it cited mainly developments related to energy prices. It also warned of higher food prices despite an increase in domestic production.

"The outlook for diesel, natural gas and commodity prices excluding energy contributed to the 2-percentage-point revision in the year-end 2026 forecast," Karahan said.

The bank also incorporated the effects of changes to the fuel-price adjustment mechanism, higher food inflation assumptions and administered prices into its projections.

Türkiye's annual consumer inflation stood at 31.75% in July, while annual inflation excluding energy and food remained slightly below 30%.

Karahan said the disinflation process had recently lost some momentum because of supply-side pressures stemming from geopolitical developments, but tight monetary policy was visibly restraining domestic demand.

"We observe a clearer slowdown in inflation in categories most directly affected by monetary policy," he said.

Last month, the central bank left its key interest rate at 37%, as expected, keeping borrowing costs unchanged for a fourth consecutive meeting as it monitors the inflationary impact of the Iran war.

Energy, food prices

Among his remarks, Karahan pointed to improvement in the services side, including in categories that last year weighed more on the inflation outlook, such as rent and education, but instead flagged food prices and energy developments.

"The initial effects of geopolitical shocks on inflation were visible primarily through sub-categories with strong links to energy and petrochemicals," he asserted.

"Accordingly, we witnessed stronger figures in energy and core goods inflation in the second quarter, which abated somewhat in July," he further said.

Rising oil and gas prices following Strait of Hormuz disruptions have impacted energy-importing countries, including Türkiye, although authorities have moved to introduce measures such as a slide-scaling system to curb the increase in prices on consumers.

"Another notable factor in recent inflation developments has been food prices," Karahan said.

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, he noted.

"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," the governor said.

Moreover, despite an overall better outlook in the services category, Karahan suggested that they 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," he added.

Demand slowing down

Among others, Karahan also said domestic demand remained at disinflationary levels in the second quarter, with card spending and trend-adjusted retail sales indicating a continued loss of momentum.

"Thanks to our tight monetary policy stance, the weakening in domestic demand has become more pronounced," said Karahan.

On the broader economic picture, he pointed out that Türkiye's trade deficit narrowed in the second quarter from the first as exports increased and imports excluding gold and energy declined.

Furthermore, he indicated that the country's gross foreign exchange reserves rose by $30 billion from March 27 to reach $185 billion as of Aug. 12, while net reserves excluding swaps increased by $35 billion to $56 billion.

Answering questions from journalists and economists, he also lauded the increase in the Turkish lira deposits, describing it as "a success."

He also flagged supply-side shocks and emphasized there were many external shocks in recent years, while underlining the importance of tight monetary policy in this regard.

"Without tight monetary policy, we would have seen even higher levels (of inflation)," he said.

"The tight monetary policy stance will be decisively maintained until price stability is achieved in line with our interim targets," the governor said.