30 December 2025

January 2026 Inflation Outcomes May Delay Interest Rate Reduction Decisions

Agenda

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Istinye University Faculty Member Assoc. Prof. Dr. Caner Özdurak Assesses the Economic Outlook for 2026

Assoc. Prof. Dr. Caner Özdurak, a faculty member at Istinye University, evaluated the economic outlook for 2026. According to Özdurak, the capacity of interest rate policies alone to sustainably reduce inflation has weakened, while the Turkish economy continues to face challenges related to low value-added growth and inflationary stickiness. Uncontrolled price increases in the services sector, exchange rate pressures, and global capital conditions further complicate the fight against inflation.

Assoc. Prof. Dr. Caner Özdurak from the Faculty of Economics, Administrative and Social Sciences at Istinye University emphasized that as Türkiye enters 2026, the primary need is a qualified economic transformation that goes beyond monetary policy tools.

“Uncontrolled Price Increases Undermine the Fight Against Inflation”

Stating that the effectiveness of the current interest rate policy in combating inflation has diminished, Assoc. Prof. Dr. Özdurak continued:

“If the fight against inflation in 2026 continues to rely solely on monetary policy instruments such as interest rate decisions, it seems highly unlikely that inflation will fall below 20 percent. This indicates that achieving the economic administration’s targets will be difficult. For lasting success, the overall economic framework, industrial policies, and macroeconomic strategies must be restructured. The Turkish economy is increasingly dependent on a low value-added services sector. In particular, uncontrolled price increases in services create inflationary stickiness and weaken disinflation efforts. There is also an urgent need for reform in housing and education expenditures. Despite these adverse factors, I anticipate that interest rate cuts may continue cautiously; however, if inflation in January 2026 comes in significantly higher than expected, rate cut decisions may be skipped.”

“A Low-Quality Growth Model Threatens Exchange Rate Stability”

Highlighting that a low-quality growth model undermines sustainable foreign currency inflows and exchange rate stability, Özdurak stated:

“Persistent expectations of high inflation combined with the likelihood of continued rate cuts reduce the attractiveness of real interest rates, creating upward pressure on the exchange rate. When analyzing Türkiye’s third-quarter growth figures, the core problem becomes evident: growth drivers such as construction and finance—low-productivity, low value-added sectors—indicate that resources are being directed toward speculative gains rather than innovation. This structure imposes a condition in which society is expected to be content with merely meeting basic needs such as food and shelter. Such a low-quality growth model reduces the potential for strong and sustainable foreign exchange inflows and threatens exchange rate stability.”

“Federal Reserve Expectations Influence Global Capital Flows”

Özdurak further noted that expectations of U.S. Federal Reserve (Fed) officials significantly affect global capital movements:

“Although the interest rate cut cycle is approaching according to Federal Open Market Committee (FOMC) expectations, U.S. interest rates are likely to remain high throughout 2025 (with a median expectation of 3.6 percent). This implies that global capital will continue to flow toward safe havens such as the United States, maintaining capital outflow pressure on emerging markets like Türkiye. While interest rates are expected to decline toward a neutral level of around 3 percent in the medium term—potentially increasing global liquidity—foreign investor interest in Türkiye will largely depend on the country’s domestic dynamics and macroeconomic strategy.”

“The Core Expectation for 2026 Is the Launch of a Qualified Policy Response”

Emphasizing that the key expectation for 2026 is the initiation of a more qualified and comprehensive response, Özdurak concluded:

“Although methodological changes to be implemented by TURKSTAT starting in January 2026—such as determining weight structures based on National Accounts data to align with EU standards—may technically ensure international comparability, they could widen the gap between perceived inflation and official inflation figures in Türkiye due to income inequality and excessive increases in essential expenditures such as housing and rent. This, in turn, may erode trust in official data. Ultimately, the fundamental problem of the Turkish economy lies in a low value-added growth model and structural inflationary stickiness that cannot be resolved through monetary policy alone. The core expectation for 2026 is the initiation of a qualified and comprehensive struggle against these structural challenges.”