TEPAV warns: Inflation likely to exceed 2026 target, policy rate hike to 40% may be necessary
Turkey’s Economic Policy Research Foundation (TEPAV) has issued a stark warning on the country’s inflation outlook, projecting that price increases in 2026 are likely to remain above both the official targets and the forecasts of the Central Bank of the Republic of Turkey (CBRT). In its 27th Monetary Policy Assessment Note, the think tank argues that, under current conditions, disinflation will be slower than planned and that a further tightening of monetary policy may be unavoidable.
Inflation inertia remains strong
According to TEPAV, the main problem is that inflation dynamics have not yet broken. The report underlines that inflation expectations are still not firmly anchored and that rigidities in pricing behavior persist across the economy. This combination, the note stresses, creates “inertia” in inflation: past high inflation continues to feed into current pricing, wage negotiations, and contract indexation, keeping inflation sticky even as demand conditions soften.
TEPAV observes that despite a notable tightening cycle and an increase in the policy rate in recent quarters, expectations have not converged sufficiently toward the official inflation path. Businesses and households, the report notes, continue to factor in high future inflation when setting prices and wages, which in turn undermines the disinflation process.
Domestic and global risks pressuring macro stability
The assessment points out that Turkey’s inflation problem cannot be viewed in isolation from broader macroeconomic uncertainties. On the external front, global financial conditions, geopolitical risks, and volatile commodity prices continue to complicate the economic environment. Rising or persistently high global interest rates can limit capital inflows to emerging markets like Turkey, raising financing costs and pressuring the exchange rate.
Domestically, TEPAV highlights several sources of uncertainty: the sustainability of fiscal policy, wage and income policies, the trajectory of administered prices, and the credibility of medium‑term economic planning. These factors, the report argues, intensify pressure on macroeconomic stability and increase the risk that inflation will stay above target for longer than currently anticipated.
Reminder of the Central Bank’s legal obligations
A notable part of TEPAV’s message concerns the CBRT’s accountability framework. The report explicitly refers to Article 42 of the Central Bank Law, which requires the bank to explain to the public the reasons for any deviation from the inflation target and to present the measures it plans to take to correct the course.
TEPAV emphasizes that if it becomes evident that inflation will not converge to the target within the previously announced timeframe, the CBRT has a legal duty to communicate this clearly. That communication, the report states, should not remain at a generic level: it should detail why the target has been missed, which factors-domestic or external-have driven the deviation, and what additional steps, including possible policy tightening or complementary measures in other policy areas, will be undertaken.
According to TEPAV, such transparency is critical not just for formal compliance with the law, but also for rebuilding credibility and stabilizing expectations. The more clearly the central bank explains its strategy, the easier it becomes to align market behavior and pricing decisions with the announced disinflation path.
Call for a comprehensive structural reform agenda
TEPAV stresses that monetary policy alone cannot deliver lasting price stability. The report underlines that without support from fiscal policy and a robust program of structural reforms, efforts to bring inflation down will remain limited in impact and vulnerable to shocks.
Among structural priorities, the note implicitly points toward reforms that improve productivity, enhance competition, strengthen the rule of law, and increase predictability in regulation and taxation. Such changes, it argues, would reduce cost‑push pressures, encourage investment, and lower risk premiums, helping inflation fall in a more sustainable way.
The report poses a critical question for economic management: has a truly comprehensive structural reform program been designed and implemented, one that is consistent with the goals of disinflation and macroeconomic stability? TEPAV’s answer is that the current framework falls short and needs to be strengthened with a coherent, credible, and widely supported reform roadmap.
Need for policy coherence and social buy‑in
For TEPAV, durable success against inflation requires a policy mix that is internally consistent and socially legitimate. The think tank argues that structural reforms must be aligned with monetary and fiscal policy, and that the broader public, as well as the business community, needs to understand and support the strategy.
A reform agenda that enjoys broad ownership, the report notes, reduces political risk and helps anchor expectations. When households and firms believe that policies will not abruptly reverse, they are more willing to commit to long‑term investments and financial contracts based on lower inflation assumptions. This, in turn, reinforces the central bank’s efforts and accelerates the disinflation process.
Strong stance on interest rates: 40% policy rate recommended
One of the most concrete elements in TEPAV’s assessment is its recommendation on interest rates. The report proposes that the CBRT raise the policy rate from its current 37% level to 40%, and then maintain the effective policy rate around this level for a period sufficient to tame inflation dynamics.
The note argues that a stronger monetary stance is necessary to break inflation inertia and to better align expectations with the official disinflation path. By raising the policy rate, the central bank can further cool domestic demand, support the domestic currency, and signal its determination to reach the target.
In addition, TEPAV suggests adjusting the interest rate corridor to preserve flexibility in monetary operations. Specifically, it recommends lifting the upper band of the corridor to 43%. This, according to the report, would allow the CBRT to respond more quickly to market volatility, manage liquidity conditions more effectively, and reinforce the overall tightness of the monetary stance when needed.
Why inflation may stay above the 2026 target
TEPAV’s projection that 2026 year‑end inflation will exceed both the official target and the CBRT’s own forecasts rests on several underlying assumptions. First, the report assumes that inflation expectations will adjust only gradually, especially if communication and transparency are not significantly improved. Second, it anticipates that wage dynamics, contracts, and administered prices will continue to reflect past inflation, slowing the pace of disinflation.
The think tank also notes that without a stronger fiscal anchor-such as clearer rules on spending growth, more discipline in off‑budget practices, and a medium‑term framework that markets view as credible-monetary policy has to work harder and longer to bring inflation down. In this environment, even relatively strong rate hikes may not be enough to meet the precise targets within the planned timeframe.
Interaction between monetary and fiscal policy
The report devotes attention to the interaction between interest rate policy and fiscal decisions. TEPAV underlines that if fiscal policy remains expansive-through high public spending, tax incentives, or quasi‑fiscal measures-it can offset the dampening impact of higher interest rates on demand. In such a scenario, inflation could remain stubbornly high despite tight monetary policy.
For this reason, TEPAV calls for greater coordination between the central bank and fiscal authorities. A credible disinflation program, it argues, should be backed by a fiscal consolidation path that gradually reduces deficits, improves the composition of spending, and avoids measures that fuel demand at a time when the priority is to curb inflation.
The importance of credibility and forward guidance
Beyond the technical aspects of rate hikes or corridors, TEPAV underscores the importance of credibility. If market participants doubt that tight policy will be maintained long enough, they may not fully adjust their behavior. The report therefore highlights the role of clear forward guidance: explaining not only current decisions, but also the conditions under which policy will remain tight or be eased.
Such guidance should be realistic and consistent with data. Overly optimistic projections that are repeatedly revised can damage credibility. TEPAV suggests that acknowledging the difficulty of the disinflation task, openly discussing risks, and presenting contingent strategies would be more effective than relying on best‑case scenarios.
Brief note on the MSB helicopter incident
The report coincided in the news cycle with a separate development concerning the Ministry of National Defense. According to an official statement, a CH‑47 heavy‑lift helicopter experienced an accident in Ankara and was classified as having suffered a crash landing. Authorities indicated that there were no negative consequences for personnel, and no injuries were reported. While unrelated to the economic analysis, the incident was noteworthy as part of the day’s broader developments.
Outlook: tougher choices ahead
Overall, TEPAV’s 27th Monetary Policy Assessment Note delivers a clear message: under current policies and expectations, the disinflation path is at risk, and inflation in 2026 is likely to remain above official targets. To address this, the think tank calls for a stronger monetary stance, anchored by a policy rate around 40%, a more flexible interest rate corridor, and full compliance with the central bank’s legal transparency obligations.
At the same time, TEPAV insists that monetary tightening must be complemented by structural reforms and a more disciplined fiscal framework. Only a coherent, credible, and broadly supported policy mix, the report argues, can break inflation inertia, restore macroeconomic stability, and bring Turkey closer to its medium‑term inflation goals.