Turkey Postpones Single-Digit Inflation Goal by Two Years, Cuts Growth Forecast

Turkey has pushed back its target for achieving single-digit inflation by two years, now aiming for 2029 instead of the previously set 2027. The new economic plan for 2027-2029, presented by Vice President Cevdet Yılmaz, outlines a path where inflation is projected to fall from 28.4% at the end of the current year, to 21% in 2027, 13.5% in 2028, and finally reach 9% in 2029. This revised trajectory indicates a slower reduction in inflation than initially promised, extending the expected timeline by four years.

Concurrently, Turkey's growth forecast for the current year has been lowered to 3.3% from 3.8%, with next year's growth set at 4.2%. This slowdown in economic expansion will impact government tax revenues and real household incomes, which are already being eroded by double-digit price increases. The plan attributes approximately seven percentage points of the inflation forecast to the direct and indirect effects of the Middle East conflict, exacerbated by Turkey's heavy reliance on energy imports and its geographical proximity to the conflict zone, which adds a risk premium to its currency and credit.

Despite inflation peaking at 75.5% in mid-2024 and subsequently declining, the pace is slower than anticipated. Turkey's Central Bank is maintaining a high interest rate, currently around 37%, to curb price rises, a strategy the new plan implicitly endorses. The Turkish Lira operates under a managed float system, with authorities intervening primarily to smooth out sharp fluctuations. The economic plan assumes the lira will move in line with inflation differentials with trade partners, without significant shifts in either direction over the next three years, a scenario dependent on inflation decreasing as projected.

For foreign investors, Turkey remains a market offering high nominal yields but also significant currency risk. Local bonds yielding tens of percent annually can lose substantial value if the lira weakens, making the real interest rate the key metric for traders. Upcoming elections introduce a political dimension, as governments facing elections often increase public spending and minimum wages, actions that could counteract the plan's disinflationary goals. Yılmaz presented the document as binding, with next year's budget to be derived from it.