Turkey Set Itself a 16% Inflation Target After Years of Unorthodox Policy. Can It Actually Get There?
Turkey spent several years running one of the most unconventional monetary experiments in recent economic history. Between 2021 and late 2023, the central bank repeatedly cut interest rates even as inflation climbed, acting on the belief, held by President Recep Tayyip Erdogan, that high rates cause inflation rather than fight it. The result was a currency crisis that cut the lira's value by more than half in real terms over ten years, and inflation that reached 85% in October 2022 before the policy direction changed.
The change, when it came, was dramatic. Turkey installed a new central bank governor in mid-2023 and reversed course completely, raising interest rates sharply and adopting orthodox monetary policy. By early 2025, inflation was at 34.9%, still high but clearly moving in the right direction. Turkey's central bank is now targeting 16% inflation for 2026, and the country is projected to see significant improvement as painful but orthodox policy reforms take hold.
What makes Turkey's inflation trajectory notable is how far it has come and how much further it still needs to go. The lira stabilised relative to recent years, though it remains deeply depreciated against major currencies in historical terms. The central bank's net foreign reserves, which had been negative for years, have started to rebuild, providing some ammunition to defend the currency if needed.
The risk factors remain significant. Turkey is heavily dependent on imported energy, meaning the Middle East conflict has directly increased input costs for businesses and households alike. Services inflation has proven sticky even as goods inflation has moderated. And the political environment means any future reversal of orthodox policy would produce immediate credibility damage in financial markets.
For Turkish households, inflation at 34.9% in 2025 still meant real wages being eroded faster than nominal wage gains in many sectors. The target of 16% for 2026 would represent genuine relief if achieved, but the path there requires the central bank to hold its discipline through a year in which energy costs are pushing up against its disinflation plans.
