CBRT Governor Karahan Signals Easing in Services Inflation Rigidity, Warns on Oil Shock Risks

Fatih Karahan told parliament that Türkiye’s inflation exceeded expectations in early 2026, but noted early signs of improvement in services inflation dynamics. Speaking at the Grand National Assembly of Turkey Planning and Budget Committee, Karahan emphasized that tight monetary policy will remain in place amid geopolitical risks, particularly rising energy prices linked to regional conflict.

Inflation Overshoots Forecasts

Karahan said cumulative inflation in the first four months of the year surpassed 14%, significantly above the central bank’s initial projections.

“Recent developments and their impact on the medium-term inflation outlook will be shaped by our monetary policy stance,” he said.

He added that geopolitical tensions—particularly the Iran-linked conflict—have disrupted the disinflation process but have not altered the bank’s policy resolve.

Tight Policy to Continue

Reaffirming the central bank’s commitment to price stability, Karahan said policymakers are using all available tools to manage demand and expectations.

He stressed that decisions are based on a broad assessment of current data and forward-looking indicators, rather than a single variable.

“We do not base decisions on a single scenario. We evaluate all factors affecting inflation together,” he noted.

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Services Inflation Shows Signs of Easing

One of the key takeaways from Karahan’s remarks was a partial improvement in services inflation, which has long been a sticky component of Türkiye’s price dynamics.

“Rigidity in services inflation, largely driven by backward indexation behavior, has begun to ease to some extent,” he said.

The central bank will update its forecasts in the upcoming inflation report.

Energy Prices Pose Near-Term Risks

Karahan highlighted the impact of rising energy costs:

• Energy prices increased by nearly 20% in the past two months
• Transportation services rose by 13%
• Petrochemical products climbed 5%

He warned that unless energy and food prices stabilize, inflationary pressures will persist in the short term.

Central Bank Losses and KKM Impact

Addressing the central bank’s balance sheet, Karahan said losses were largely driven by:

• Costs linked to the FX-protected deposit scheme (KKM)
• Interest expenses from liquidity sterilization

He noted that the reported loss reached 1.065 trillion TL, but stressed that central bank losses do not hinder effective policy implementation.

FX Policy and Reserves

Karahan reiterated that the central bank maintains reserves to guard against external shocks and manages exchange rate policy to limit excessive volatility in the Turkish lira.

Despite fluctuations driven by global capital flows and trade dynamics, he said reserves remain at adequate levels.

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Carry Trade and Capital Inflows

Karahan confirmed increased foreign investor interest in Turkish assets:

• Growth in carry trade positions
• Rising demand for bonds and equities

He noted that these inflows are supporting reserves and reducing Türkiye’s risk premium, while also lowering external borrowing costs.

Flexible Response to Geopolitical Risks

On the impact of the Iran-related conflict, Karahan said the central bank has taken proactive liquidity measures to keep overnight rates near the upper band of its policy corridor.

“We have the flexibility to quickly return to pre-conflict operational conditions if geopolitical risks subside,” he said.

Disinflation Key for Social Stability

Karahan emphasized that high inflation disproportionately affects low-income households.

“Disinflation is not a burden—it is the only sustainable way to protect purchasing power,” he said.

Outlook

The CBRT is expected to maintain a cautious, data-driven approach in the coming months, balancing inflation risks from energy prices with signs of moderation in domestic price pressures.

Turkish press sources