Türkiye sticks to disinflation despite higher near-term outlook

Türkiye aims to continue its disinflation process without interruption despite a higher-than-earlier-expected inflation projection in the near future due to the fallout from the Iran war, according to its updated economic blueprint.

The 2027-2029 Medium-Term Program (MTP), unveiled Sunday, projects a year-end inflation forecast of 28.4%, compared to 16% estimated last year.

Officials said the war in the Middle East had played a key role in the upward revision of the inflation outlook.

The direct and indirect effects of the conflict on inflation have been estimated at approximately 7 percentage points, according to the Central Bank of the Republic of Türkiye (CBRT).

Türkiye’s annual inflation rate eased to 31.51% in August from 31.75% in July, according to official data. The decline had stalled following a sharp rise in energy prices caused by the Iran war.

Inflation is projected to fall to 21% in 2027, 13.5% in 2028 and 9% in 2029, according to the MTP.

The program identifies breaking inflation inertia and restoring price stability by bringing inflation back to single-digit levels as a key objective.

To achieve this, it says monetary, fiscal and income policies will remain closely coordinated, while demand conditions will be kept on a non-inflationary path.

The contribution of domestic demand to the decline will be supported by more favorable cost conditions, while policies aimed at strengthening competition in product markets and increasing supply-side capacity will seek to raise Türkiye’s production potential.

The government also expects lower inflation and a more balanced income distribution to contribute to a lasting increase in welfare.

The CBRT will continue to use all available policy tools effectively until price stability is firmly established, the program said.

Breaking inflation inertia

The central bank will continue to implement an inflation-targeting regime and a floating exchange-rate regime as part of the fight against inflation.

Exchange rates will continue to be determined by supply and demand under free-market conditions, while communication channels will be strengthened to help anchor inflation expectations in line with official targets, the program says.

The government also plans to increase public awareness of the “Market Prices” website, which publishes prices from major supermarket chains, in an effort to improve market transparency.

The program calls for a broad shift away from backward-looking price-setting based on past inflation toward pricing based on expectations.

It also aims to reduce price rigidities and prevent persistent inflation inertia. Administered and regulated prices will be brought into greater alignment with inflation forecasts and targets.

Food price stability

The government plans to strengthen food supply security and price stability by taking a broader approach to agricultural production and food markets.

Prices paid for agricultural products will be determined with consideration for their impact on public finances, market dynamics and program targets, while seeking to reduce the practice of indexing prices to past inflation.

Short- and long-term changes in supply and demand for food and agricultural products, as well as import and export developments, will be monitored through an early-warning approach.

Production planning for strategic agricultural products will continue to take into account supply-demand balances, self-sufficiency levels, water constraints and regional production potential, the program said.

DAILYSABAH