According to economist Fatih Özatay writing in YetkinReport, the Turkish Central Bank's Monetary Policy Committee cut the policy rate by 100 basis points to 39.5% on October 23, marking another reduction despite inflation indicators moving in the wrong direction across all key metrics previously identified as decision-making criteria.
The rate cut comes as Turkey's annual inflation remains stubbornly stuck around 33%, more than double the government's 16% target for year-end 2026. Monthly inflation has hovered in a narrow band between 2.5% and 2.7% from July through September, with early indicators suggesting October could reach 3%.
"In the economic conditions we are in, whether the policy rate has been reduced by one point or kept constant, what importance does it have for inflation?" Özatay questioned, suggesting that maintaining rates would not have significantly advanced progress toward the 2026 target either.
The deteriorating inflation picture extends beyond consumer prices. Producer price inflation has risen steadily since April, climbing 4.2 percentage points to reach 26% in September, signaling additional pressure on consumer prices ahead. The Central Bank's own "Monthly Price Developments" report acknowledged that "indicators monitored within the TCMB indicate that the main trend of inflation increased on a monthly basis in September."
Most troubling for policymakers, inflation expectations among the business sector - the group with actual price-setting power - remain elevated at 36.8% for the year ahead, despite a slight decline in September. Özatay notes that household and market participant expectations matter less since workers lack bargaining power due to low unionization rates and weak collective negotiating strength.
Finance Minister Mehmet Şimşek and Central Bank Governor Fatih Karahan were recently spotted at an investor roadshow in the United States, attempting to attract foreign investment despite the challenging inflation backdrop.
The core problem, according to Özatay and a recent TEPAV Monetary Policy Assessment Note published October 22, is that Turkey's economic program remains incomplete, relying almost exclusively on monetary policy and limited fiscal measures. "It is not possible to solve current economic problems only with monetary policy and a little fiscal policy," the analysis states.
The assessment identifies critical missing elements: establishing a fair and efficient judicial system, ensuring rule of law, implementing comprehensive tax reform, combating the informal economy, restructuring public spending for efficiency, improving competition, and making key institutions like the Central Bank and statistical agency genuinely independent.
"Of these, what is being done?" Özatay asks. "Only a small part of what is stated in the third item of the quote: there is an effort to combat informality. Other than that? Nothing."
With presidential and parliamentary elections scheduled for spring 2028, and considering Turkey's historical pattern of pre-election economic policy shifts, Özatay predicts the inflation fight will likely be abandoned by early 2027. "Whatever level it drops to by late 2026 (25%?) will most likely be the lowest level for the 2026-2028 period," he warns, adding "with the hope of being wrong."
Photo: Gemini AI