Turkey’s Economic Balance
Turkey is closing out a year in which it appears to have successfully balanced its monetary policy, keeping it tight enough to reduce inflation without pushing the economy into recession. After years of high inflation, the country has seen a steady downward trend in 2025, with annual inflation dropping from above 42% to just over 30%. This is the lowest level since late 2021.
Inflation Reduction
The authorities do not plan to significantly reduce their broader inflation-fighting policies in 2026. These policies have been in place since mid-2023, when policymakers sharply increased interest rates before starting to gradually cut them at the end of 2024. Data from October and November shows that disinflation is back on track after a summer of price pressure. The Central Bank of the Republic of Turkey (CBRT) noted "signs of improvement" in pricing behavior and expectations when it cut interest rates by 150 basis points at its final meeting of the year on December 11.
Current Inflation Status
Headline inflation eased to nearly 31.1% in November, down from 32.9% in October, mainly due to a slowdown in food prices. However, prices in sectors like housing and education remain a challenge. The central bank’s end-2025 interim inflation target was 24%, with a forecast range of 31%-33%. Inflation expectations, although still high, have been declining among market participants, businesses, and households. Government officials expect inflation to fall into the 20% range in early 2026.
Key Test for Inflation
A critical test for the downward trend in inflation arrives in the first quarter of 2026: a 27% increase in the minimum wage. This hike is higher than the government’s 2026 inflation target and slightly exceeds analyst expectations, potentially creating new upward pressure on prices. The central bank expects inflation to fall to its 16% interim target by the end of 2026, with a projected range of 13%-19%.
Future Monetary Policy
The CBRT shaved 950 basis points off its one-week repo rate in 2025, bringing it down from 47.5% to 38%. The first of eight planned meetings for 2026 is scheduled for January 22. While the central bank emphasizes that future decisions will be data-driven, it is widely expected to continue its easing cycle. Analysts expect gradual 100-150 basis-point cuts if the underlying trend continues to improve. Economists predict the key policy rate could be lowered to about 28% by the end of 2026.
Economic Growth
Despite high borrowing costs intended to cool the economy, Turkey appears to have achieved a "soft landing," with inflation easing and the labor market cooling in an orderly fashion. The country’s gross domestic product (GDP) is forecast to have overtaken that of Italy in 2025, making it Europe’s fourth-largest economy when measured using purchasing power parity (PPP). According to the International Monetary Fund (IMF), Turkey’s GDP (PPP) is estimated at $3.77 trillion, while Italy’s is roughly $3.72 trillion.
Labor Market and GDP
The labor market has remained resilient, with the unemployment rate in single digits for more than two and a half years. Although the rate edged up slightly to 8.6% in November, the government’s program envisions it remaining below 8.5% through 2027 before dropping to 7.8% in 2028. GDP expanded by a lower-than-expected 3.7% year-over-year in the July-September period, while the seasonally adjusted quarterly pace held at a solid 1.1%, defying expectations of a sharp slowdown.
Buffers Rebuilt
Two additional factors have eased concerns about the state of the Turkish economy in 2025. The first is the reserve accumulation drive, which saw the central bank aggressively rebuild its foreign exchange buffers. Turkey’s total gross reserves neared a record $200 billion in mid-October, compared to approximately $158 billion at the beginning of the year. The second factor is a stabilization trend in the country’s external balance, with Turkey recording a current account surplus for the fourth consecutive month in October.
Conclusion
In conclusion, Turkey has successfully navigated a challenging year, balancing its monetary policy to reduce inflation without causing a recession. The country’s economic growth has been resilient, and its labor market has remained stable. With inflation expectations declining and the central bank expected to continue its easing cycle, Turkey is poised for further economic growth in 2026. The rebuilding of foreign exchange buffers and the stabilization of the external balance have also eased concerns about the economy. Overall, Turkey’s economic outlook for 2026 appears positive, with the potential for continued growth and disinflation.
