- 'The ongoing war has led to a pronounced increase in energy prices, exerting cost-push pressure on inflation. Beyond the direct impact of energy prices, we may also observe indirect inflationary effects across various sectors'
- 'In the medium term, the war will have both supply- and demand-side effects on inflation. Cost- and supply-side disruptions have already started exerting supply-side pressures'
ISTANBUL
The governor of the Central Bank of the Republic of Türkiye (CBRT) said ongoing tensions in the Middle East have driven a sharp rise in energy prices, adding cost-push pressure on inflation and indirectly affecting prices across sectors.
In the medium term, the war is expected to have further side effects on inflation; cost- and supply-side disruptions already creating additional pressures, Fatih Karahan told Anadolu.
Highlighting the bank's measures to limit the war's impact on the inflation outlook, Karahan said: "We are determined to ensure the tightness required for the continuation of the disinflation process."
Measures to reduce inflationary effects
Anadolu Agency: How does the rise in oil and energy prices caused by the war in our region affect inflation in Türkiye? What do the Central Bank’s calculations for the short and medium terms suggest?
Governor Fatih Karahan: The ongoing war has led to a pronounced increase in energy prices, exerting cost-push pressure on inflation. Beyond the direct impact of energy prices, we may also observe indirect inflationary effects across various sectors.
Our analyses indicate that a permanent 10 percent increase in oil prices adds approximately 1.1 percentage points to consumer inflation over a year. The implementation of the sliding-scale system significantly mitigates the spillover of this impact to consumer prices. According to our calculations, the sliding-scale system reduces the impact of oil prices on inflation to one-third.
In the medium term, the war will have both supply- and demand-side effects on inflation. Cost- and supply-side disruptions have already started exerting supply-side pressures. On the other hand, demand-side effects will be shaped by domestic and external policies to be pursued during this process.
So far, we have promptly introduced measures to reduce inflationary effects. Currently, uncertainties remain as to the course of the war. We will ensure the tightness required to contain the inflationary effects of the developments through expectations and pricing behavior.
Cooling of economic activity will affect the trade balance favorably
Anadolu: How has the war affected Türkiye’s growth and current account deficit dynamics? To what extent have your forecasts changed?
Karahan: We expect the rising energy costs, external uncertainties, and the resulting potential weakening of external demand to create a downward pressure on economic activity. The growing uncertainties will also have an impact on investment appetite and private consumption. Our analyses suggest that a 10-percent supply-side increase in oil prices leads to a 0.4-to-0.7 percentage points of decline in the growth rate over a one-year period.
Recent developments will affect the current account balance diversely through energy and non-energy items. Our analyses show that a 10-dollar increase in oil prices deteriorates the one-year net energy balance by approximately three-to-four billion dollars. In case of a parallel rise in natural gas import prices as well, this impact may go up to five billion dollars.
Regarding non-energy items, we can say that a potential moderation in global demand will have an upward effect on the current account deficit through exports and tourism. However, cooling of economic activity will affect the trade balance favorably.
At present, the level of the current account deficit is below its historical average. We think that the possible deterioration of the current account balance amid recent developments will be manageable.
Taking measures to limit the impact on the inflation outlook
Anadolu: Recently, there has been a decline in reserves. Are you planning to make a change in the exchange rate regime amid foreign outflows?
Karahan: As we shared in the monetary policy document, we will maintain the current exchange rate regime in 2026. Emerging economies have seen capital outflows during this period. Countries respond to these outflows in different ways by taking into account their impact on the inflation outlook. The pressure on reserves emerges as a natural outcome of changes in the global risk appetite. In this context, we are taking measures to limit the impact of this risk aversion on the inflation outlook. With the outbreak of war, we began funding at the upper band. During this period, we started to conduct Turkish lira-settled foreign exchange forward selling transactions with residents. In addition, we brought forward our bond purchases, thereby preventing a possible outflow from money market funds. These measures have helped maintain the attractiveness of the Turkish lira in domestic markets. While there has been a moderate domestic demand for gold and foreign currency during this period due to falling gold prices, residents’ FX demand has remained limited compared to previous stress periods.
I would like to reiterate that we are facing an external situation which adversely affects our fight against inflation. We are determined to ensure the tightness required for the continuation of the disinflation process.
"Via location swap transactions, we use domestic gold in international markets"
Anadolu: Mr. Governor, another hot topic that has been widely debated in the public sphere is your reserve policy. People say that you have been selling gold from your reserves. Today, you started Turkish lira/currency swap transactions, too. There are comments about the sustainability of your reserve policy. What is your take on this issue?
Karahan: Our primary objective in maintaining reserves is to reinforce confidence in monetary and exchange rate policies and to protect our economy against likely adverse effects of global and geopolitical developments. We have increased our gold reserves over the years. We have doubled our gold reserves that were 377 tons back in 2016. As of March 2026, the share of our gold reserves in total reserves exceeded 60 percent. Therefore, it is very natural to use gold-based transactions when FX liquidity needs to be supported.
The rising share of gold in reserves is closely related with the role that gold plays in our financial system. Banks can maintain gold as required reserves. Gold-backed securities issued by the Ministry of Treasury and Finance are an important part of the banking system. This requires gold to be used in the scope of liquidity management. Swap is one of the most commonly used instruments in liquidity management. We, too, manage the financial system’s liquidity by using different kinds of swap transactions.
Via location swap transactions, we use domestic gold in international markets. Likewise, we have been reinforcing our foreign exchange liquidity by the recent FX/Gold swap transactions that we have been carrying out. Recently, we have used some part of our gold for FX/Gold swaps. Apart from that, we have sold some gold as well.
I would like to underline that, in central banking, it is not a correct approach to assess such transactions with a mere profit-loss perspective. Our priority is financial stability and policy effectiveness. The transactions that we have been conducting in this scope are intended to reinforce our foreign exchange position. Moreover, most part of these transactions are in the form of Gold/FX swaps , which means this gold will return to our reserves at the end of the maturity.
Besides gold, we can conduct Turkish lira-Currency Swap transactions with banks as well. Recently, the foreign exchange liquidity in the banking system has increased due to the decline in swap transactions conducted with foreign institutions, while the need for Turkish lira funding has increased. Banks have started to demand swap transactions with the Central Bank again. And today, we resumed Turkish lira-Currency Swap transactions.
The fact that banks have started to demand swap transactions with the Central Bank again shows that there is no foreign currency liquidity squeeze in the system and that the exchange rate regime that we have been implementing is on the right track.
We consider all these transactions as part of our liquidity management. The maturity and volume of transactions are controlled by the Central Bank. We may increase or decrease the transaction volume depending on market conditions.
To sum up, we implement a proactive, flexible and controlled approach in reserve management and liquidity instruments. The objective of all the steps we take is to support price stability and reinforce financial stability.
