The Turkish central bank raised its interim inflation targets on Thursday, warning that the short-term inflationary effects of the Iran war would remain "pronounced."

Presenting the bank's second quarterly inflation report this year and the first since the conflict started, Governor Fatih Karahan announced the decision to change the interim inflation target for 2026-end to 24% from 16%.

Speaking in Istanbul, Karahan noted the bank had also lifted its end-2027 interim inflation target to 15% from 9% and its end-2028 interim target at 9%.

The upward revisions came after the bank kept its key interest rate at 37% last month, holding steady for the second successive policy meeting despite some expectations for a tightening of policy due to war-related disruptions.

"While the central question before us is how long the regional tensions and pressures on energy supply will persist, we assess that the related inflationary effects will remain pronounced in the short term," Karahan said.

How long the tension lasts is a critical risk factor for the inflation outlook, he said, adding there "would be no compromise on the bank's determination to bring down inflation and that it would continue to use all available tools for disinflation."

Starting his speech and addressing the global outlook, the governor noted that the closure of the Strait of Hormuz poses a risk to the global energy supply, while adding that leading indicators "point to a slowdown in global economic activity, a rise in input costs, and disruptions in supply chains."

Move away from forecast ranges

At the same time, Karahan said the war and its impact had prompted the bank to reconsider the communication of uncertainty around forecasts and it had decided that "moving away from 'forecast band communication' is an appropriate approach."

The bank still said it forecasts that inflation would be 26% by the end of 2026, 15% at the end of 2027, and 9% at the end of 2028 before stabilizing at the medium-term target of 5%.

In its previous quarterly inflation report in February, the bank had raised its year-end inflation forecast band by two percentage points to 15%-21%.

The governor said the bank needed to focus on short-term inflationary impacts for now to hinder a deterioration in the inflation outlook.

The bank has flexibility with its rate corridor when risks are on the upside, with all options on the table in the period ahead, he added.

Energy prices

The war-related surge in energy prices weighed on Türkiye's inflation in April. Monthly inflation surged to 4.18% and 32.37% year-over-year.

"Compared to the peak in May 2024, a significant fall in inflation has been achieved, yet inflation is still high," Karahan said as part of his remarks.

He further said that the tension in the Middle East became "the primary factor in the recent inflation outlook."

"The annual energy inflation, which was displaying a slowdown, rose by 19 points to 47% mainly due to oil and natural gas prices over the past two months," he said.

Since the start of the U.S.-Israeli strikes on Iran two and half months ago, global energy prices have surged considerably, with oil prices settling around $100 in recent days compared to around $70 just before the conflict.

On the macroeconomic side, he said that despite challenges in global trade and geopolitical conditions, exports increased in April while imports declined.

"While there was a partial recovery in exports to the Middle East, exports to Africa, the European Union, and North America increased."

"Although energy imports rose due to high prices, imports excluding gold and energy decreased. As a result, the trade deficit narrowed in April compared to the first quarter," he added.

He also suggested that the current account deficit-to-GDP ratio continued to remain below the historical average.

As annual inflation slowed from levels above 40% at the start of last year to 30.65% in January, the central bank slashed its key rate by 900 basis points in five steps since last summer.

It then made a smaller-than-expected 100-basis point cut to 37% in January and has held rates steady in subsequent meetings.