Türkiye | Upside risks to inflation outlook amid recent war

Summary

Consumer prices inflation came in at 1.94% m/m in March, below both our (2.2%) and market (2.3%) expectations, bringing annual inflation down to 30.87%. However, rising energy prices, ongoing geopolitical uncertainty, and adverse supply-side factors are reinforcing upside risks to the inflation outlook.

Key points

• Key points:
• The sliding scale system in fuel prices prevented an upward impact of ~0.45pp on monthly CPI. The decline in headline was mainly driven by food and services prices. Seasonally adj. monthly inflation also decelerated (2% m/m vs. 2.8% prev.), largely due to food inflation, offsetting adverse contributions from core and energy.
• Core C inflation (seas. adj., 2.05% m/m vs prev. 1.8%) worsened, driven by increases in core goods and continued stickiness in services inflation. Although the average of trend inflation indicators and median inflation showed some improvement on a monthly basis in March, median inflation excluding food and energy has been deteriorating since Sep25, hovering close to 2%.
• Timely policy actions have mitigated some of the adverse impacts of geopolitical risks; however, significant uncertainty remains on both the duration and intensity of the conflict. Inflation expectations, still elevated and not yet firmly anchored, worsened slightly in March, while inflation inertia stays strong. Moreover, risks to the sustainability of the external balance are on the rise.
• The increasing likelihood of a more prolonged conflict has added further upside risks to the inflation outlook. Based on current forward prices and higher than expected energy price hikes for households and producers as of April, we estimate an additional 3-4pp increase with upside risks relative to our 25% year-end CPI forecast, which was based on Brent at $69 and gas at $12/MMBtu on average in 2026.
• In light of rising risks to both inflation and external balance, monetary policy may need to remain tight for longer. Should pressures on the CBRT reserves intensify, a policy rate hike at the April MPC meeting appears increasingly likely. We will reassess our forecasts once the outlook becomes clearer.

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