Turkey lifts inflation outlook, pegs 2027 at 21% as war and fund crisis bite

What changed in the outlook

Turkey's central bank now sees year-end 2026 inflation at 29.5%, up from 28%, and projects 21% by the end of 2027, previously 15%. It also lifted what it refers to as its inflation target - the marker it uses to steer policy - to 21% from 15%.

Karahan unveiled the updates on Thursday and said they do not amount to a shift in stance. The bank, he noted, "shapes monetary policy decisions by looking at the trend emerging over a few months and the inflation outlook this implies," and he indicated that conditions have improved as the year progressed into its later months.

He also pointed to cooler economic activity and softer domestic demand as offsets to external price pressures.

Why the revision now

Officials tied the higher path to lingering effects from the Iran war and turbulence linked to the fund scandal. Policymakers expect the conflict's influence on inflation to persist, largely via energy costs, even as Middle Eastern oil exporters try to return output to pre-war levels. That matters more for Turkey because it buys almost all of its oil and gas from abroad.

The fund saga led to 131 funds being unwound, totaling roughly $20 billion and touching close to half a million account holders. Some products were tied to TLREF-indexed bonds, so the central bank stepped up purchases of those securities to support market functioning, Karahan said.

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Policy signals and market reaction

October brought the first rate reduction since the Iran war began, trimming the policy rate by 1 percentage point to 36%. Karahan emphasized that raising forecasts does not mean policy is changing direction, and that future moves will be judged one meeting at a time.

Market moves were muted. The lira and government bonds barely budged, while the Borsa Istanbul 100 was up 1.3% at 12:03 p.m. local time in Istanbul.

External views differed on the path ahead. Selva Bahar Baziki of Bloomberg Economics said, "The revisions chiefly reflect supply-side pressures stemming from global shocks. Even so, the new end-2027 view remains slightly below our 23.8% estimate. Despite the upward revisions, we expect the central bank to keep easing monetary conditions gradually. We see the key policy rate falling to 35% by the end of this year, and to 27% by the end of 2027, from 36% now." BBVA's Tufan Comert added, "We believe the central bank retains room for additional measured rate cuts." Coex Partners' Henrik Gullberg noted, "They talk hawkish and revise up inflation forecasts, but that of course is not entirely consistent with their actions, with continued cuts and loan-growth limits being relaxed."

A marginal climb in inflation to 29.8% in October from 29.7% is widely seen as insufficient to halt easing. Karahan said the bank would deploy its tools if price gains start to accelerate in a sustained way and alter the underlying trend.

What this means for your portfolio

Higher projected inflation and a higher policy guidepost compress real returns on lira assets and keep the policy path tricky. The bank is signaling gradual easing while reserving the option to lean against any renewed acceleration in prices. If you have exposure to Turkish bonds, TLREF-linked paper, or local equities, watch the balance between war-driven energy costs, the lingering impact of the fund liquidations, and a central bank that is easing into a still high-inflation backdrop.

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