Türkiye's central bank holds tight policy on inflation

CBRT's Determined Stance Against Enduring Inflation

The Central Bank of the Republic of Türkiye (CBRT) maintains a determined monetary policy stance, aiming to achieve price stability by addressing enduring inflation. Governor Fatih Karahan, in a speech delivered on 1 September 2026 for the 2026 Inflation Report, emphasised this approach, which considers both short-term dynamics and medium-term objectives.

Despite supply-side shocks, which have negatively affected the disinflation process, the CBRT observes the constraining effects of its monetary policy on demand conditions. This is evidenced by core goods inflation remaining subdued and the reduction of inflationary inertia in certain services items, indicating continued disinflation.

The central bank interprets these domestic developments as a direct outcome of its deliberate policy actions and pledges to continue utilising all available tools to meet its primary mandate of price stability.

Global Economic Volatility Complicates Disinflation Efforts

Global geopolitical developments have introduced significant volatility since May 2026, complicating disinflation efforts.

Following a brief reduction in geopolitical risks after the US and Iran reached an agreement in June, subsequent reports concerning the conflict's progression and potential new accords led to renewed fluctuations, contributing to continuing uncertainty in the global economic outlook.

While global supply conditions have marginally improved, input costs and freight rates remain elevated, and supply chain disruptions persist. Shipping activity through the Strait of Hormuz, critical for global energy supply, initially increased after the agreement but later reduced again, approaching inactivity.

Oil and natural gas prices, after approaching pre-conflict levels post-agreement, increased once more and currently display elevated and fluctuating patterns. Consequently, import prices have increased since the conflict began, as noted in the CBRT’s 1 September 2026 assessment.

Domestic Demand Moderates, External Trade Provides Support

Türkiye's domestic economy showed a deceleration in growth during the first quarter of 2026, a trend that confirmed demand conditions consistent with the CBRT's tight monetary policy. The second quarter of 2026, however, recorded a partial improvement in growth, primarily driven by external demand, even as private consumption exhibited a subdued tendency.

Industrial production, after a largely stable trajectory in the final quarter of 2025 and the first quarter of 2026, posted an increase in the second quarter, supported by exports exceeding expectations. Conversely, services production decreased on a monthly basis in April and May 2026, remaining largely unchanged quarterly.

The manufacturing industry's capacity utilisation rate marginally increased in the second quarter but stayed below its long-term mean, experiencing a minor reduction in July 2026. In the labour market, the headline unemployment rate decreased in the second quarter, remaining considerably below the long-term average, though broader indicators suggest more relaxed conditions. Retail sales growth, excluding gold, was reduced compared to the preceding quarter.

Monetary Policy Rigour and Global Capital Flow Implications for Asia

The Central Bank of the Republic of Türkiye will maintain its restrictive stance, committing all instruments to achieve price stability, particularly as inflation expectations and pricing behaviour remain important considerations.

Globally, inflation forecasts have been adjusted higher with the onset of the conflict, and the potential for secondary effects could worsen the global inflation outlook, increasing anticipation of more restrictive monetary policy globally.

This environment, coupled with the US Federal Reserve's decision to end its forward guidance and the impending actions of the Bank of Japan, introduces greater uncertainty regarding global interest rate trajectories. These developments are determining factors for global risk appetite and portfolio flows.

For Asian markets, this scenario implies continued volatility in capital movements. Emerging Asian economies, which have seen varying degrees of portfolio investment, should anticipate ongoing shifts, particularly in equity and debt markets.

The Bank of Japan's policy adjustments, expected to influence global liquidity, will be a crucial factor for Asian asset valuations and investment decisions in the coming months, with its impact likely becoming clearer after its next policy meeting.