Turkish central bank aims to build reserves, maintain tight monetary policy

The Turkish Central Bank has outlined a strategy to bolster its international reserves and reinforce its commitment to disinflation under a new medium-term economic program. The plan, covering 2026-2028 and prepared by the Presidency of Strategy and Budget, emphasizes building buffers while maintaining a restrictive policy stance to steer inflation toward the official medium-term target of 5%.

A Data-Driven Approach to Inflation Targeting

Policy decisions will be based on comprehensive analyses of price dynamics, inflation forecasts, demand conditions, and financial stability indicators. To enhance transparency and accountability, the bank will publish quarterly inflation reports featuring year-end interim targets. These interim goals are set at 24% for 2025, 16% for 2026, and 9% for 2027, with a commitment to provide a detailed assessment if actual year-end inflation deviates significantly from these projections.

Commitment to Monetary Tightening and Market Reforms

The bank affirmed it will sustain a tight monetary policy until price stability is durably achieved, utilizing the policy rate to influence demand, exchange rate expectations, and overall inflation trends. It warned that further policy tightening would be implemented if the inflation outlook deteriorates. Concurrently, efforts to strengthen the monetary transmission mechanism will continue, ensuring market interest rates align with the policy rate. Additional macroprudential measures may be introduced if credit growth exceeds desired levels.

Reserve Management and Exchange Rate Regime

A key component of the program is the intention to increase international reserves, managed with priorities of safety, liquidity, and return. The bank reaffirmed its commitment to a free-floating exchange rate regime, stating it has no predetermined exchange rate target and will not intervene to set a level for the Turkish Lira. However, it retains the right to take necessary measures to ensure the smooth functioning of foreign exchange markets, underscoring a balanced approach between market freedom and financial stability.