Higher Inflation Ahead in Turkey Amid Lira Turbulence

Turkey’s inflation outlook has ticked upward following last week’s lira selloff, sparked by the detention and jailing of Istanbul’s mayor, Ekrem İmamoğlu. According to a Reuters poll of nine respondents, year-end inflation is now projected at 29.75%, one percentage point above a prior estimate, as market volatility threatens to weigh on the country's ambitious disinflation path.

“Provided that FX pressures remain contained, and inflationary pressures start easing from June, the (central bank) may have room to restart cuts in June,”
noted Morgan Stanley in a research note.

Slight Dip Expected in March Numbers

The annual inflation rate is forecast to drop from 39.05% in February to 38.9% in March, with monthly inflation edging up by about 3%, according to the poll. Still, this slight improvement may be overshadowed by the fallout from the lira’s recent depreciation. The Turkish currency briefly hit a record low of 42 to the dollar after İmamoğlu’s arrest, though it later recovered most losses and has hovered near 38 since then.

Central Bank Takes Swift Action

Authorities responded to the market turmoil with measures including a 400 basis-point tightening of the funding rate at an unscheduled Central Bank of the Republic of Türkiye (CBRT) meeting, alongside roughly $27 billion in FX sales to stabilize the lira. The central bank still projects 24% year-end inflation, though analysts say the government’s push to lower interest rates could slow or reverse if price pressures worsen.

Finance Minister Mehmet Simsek and CBRT Governor Fatih Karahan indicated on Tuesday’s investor call that April’s inflation reading could rise slightly due to the lira’s 4% drop, noting a “40% pass through” rate that will further elevate prices, especially for imports.

Interest Rate Outlook

Morgan Stanley has revised its year-end policy rate forecast to 33.5% from 30.5%, underscoring the unpredictability in Turkey’s orthodox economic program, which has recently hinged on gradual interest rate cuts. The next CBRT policy decision is due April 17, and economists remain uncertain if the bank will pause or potentially reverse its easing cycle.

Household Expectations Shift

Beyond the official statistics, a household inflation survey from Koc University captured a sharp change in sentiment on March 19, the day of İmamoğlu’s detention and the lira’s steep selloff. Researcher Selva Demiralp said the “political crisis is being reflected in household expectations,” hinting that consumer confidence in price stability may have been rattled.

Despite a near-term dip in inflation—aided by previous aggressive rate hikes—market watchers remain alert to signs of renewed pressure on Turkish prices. As events unfold, the debate continues over whether the government’s vision of lower inflation and lower rates can stay on course.