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Turnleaf’s latest data has pushed Turkey’s inflation outlook higher than consensus forecasts. There are multiple reasons for this which we will explain in this note.

One of the reasons is the expanding liquidity for small and medium-sized enterprises (SMEs) by the central bank. Additionally, we also believe that rate cuts have increased demand for commercial FX loans, despite relatively higher liquidity constraints, as import costs increase. This behavior dovetails with the recent 30% minimum wage hike and rising energy costs, which are jointly pushing up domestic producer prices. Another important factor is the surge in construction material costs, fueled by higher input prices and weaker real appreciation, that is driving production costs upward.

As a result, Turnleaf’s projections show inflation moderating more slowly than consensus, hovering between 41% and 37% throughout 2025. We examine these factors in more detail below.

1. Liquidity Expansion and SME Lending

A significant portion of the inflationary momentum in Turnleaf’s model stems from the year-over-year growth in commercial and consumer loans, mirroring an uptick in M3 money supply (Figure 1). This reflects macroprudential policies aimed at protecting more vulnerable consumers and smaller businesses—those most affected by the 30% wage increase. Under the new lending framework, SMEs can increase their TRY loans by 2.5% per month, while larger firms are capped at 1.5%. Meanwhile, FX loan growth has been reduced from 1.5% to 1%, encouraging borrowing in local currency.

Figure 1

By channeling preferential liquidity into smaller domestic enterprises, policymakers effectively inject more cash into the economy. This policy stance is consistent with Turkey’s ongoing objective of reducing reliance on external financing, giving the central bank more control over the exchange rate and minimizing abrupt shifts in capital flows.

2. Currency Pressures, FX Loans, and Rising Energy Costs

Despite limiting currency risk through higher reserves and lower external liabilities, a weakening lira continues to inflate the cost of imports, particularly in energy markets. With energy commodities priced in dollars, domestic producer price indices (PPI) have been rising as higher input costs get passed on to consumers (Figure 2). Recent geopolitical uncertainties in energy markets compound these pressures.

Figure 2

Although energy prices dipped in 2024, prompting increased oil stockpiling, inventories are now being drawn down. This new supply of oil to the Turkish market has temporarily boosted short-term costs (Figure 3), adding another layer of upward pressure on PPI.

Figure 3

3. Construction Costs as a Key Inflation Driver

Also, the construction sector—a critical pillar of Turkey’s economy—has experienced notable material cost increases, which further accelerate inflation. High energy prices are directly feeding into construction input costs, forcing many businesses to seek additional financing. Even as policy restricts large commercial FX loans, cost-push dynamics may compel firms to borrow in foreign currency to stay operational, ultimately passing higher costs on to consumers. These effects often manifest with a lag, contributing to the persistent upward tilt in our inflation curve.

Simultaneously, large businesses are still turning to FX commercial loans to finance imports of key inputs priced in foreign currency over TRY commercial loans (Figure 4). Even though the policy restricts FX loan growth to 1%, large firms with significant FX-denominated input costs find it difficult to avoid these loans. As the lira weakens, servicing these FX loans becomes more expensive, further amplifying cost-push inflation and feeding into higher consumer prices.

Figure 4

Taken together, targeted liquidity measures, a rising wage floor, and energy-driven PPI might be fueling a slower decline in Turkey’s inflation than many anticipate. Turnleaf’s forecast suggests policymakers must contain inflation over the long term while still easing economic burdens on SMEs and consumers. As more detailed labor market data emerges—and as fiscal and monetary policies evolve—Turnleaf will reassess the inflation outlook. The key question for 2025 remains how effectively Turkey can sustain economic relief without undermining its broader inflation stabilization efforts.

Subscribers can gain insights into the key drivers influencing Turnleaf’s CPI forecasts by examining our Word Cloud. Each term represents an economic indicator’s relative importance in our CPI model. The size of each word reflects its contribution magnitude to overall inflation predictions, helping subscribers quickly identify the most influential factors. The color coding further clarifies each indicator’s impact direction: blue words represent indicators with a disinflationary effect on CPI, while red words highlight inflationary factors. This Word Cloud enables a quick, visual analysis of the complex landscape of inflationary and disinflationary influences in our forecasting model.

Contribution Word Cloud for January 2025 Forecast