Türkiye’s disinflation process has been successful but is moving more slowly than desired, Treasury and Finance Minister Mehmet Şimşek said Wednesday, attributing the slowdown to a range of domestic and external factors.

“If there had been no war this year, inflation would be at least 7 percentage points lower as of today,” Şimşek told the private broadcaster Bloomberg HT.

He added that the conflict had affected not only oil and natural gas prices but also commodity prices more broadly, creating stronger pressure in Türkiye because the country’s inflation rate remained relatively high.

The annual consumer price index (CPI) in Türkiye eased for the third consecutive month in August to 31.5%, from 31.8% in July, while monthly inflation was 1.84%.

The downward trend that started in mid-2024 had stalled this year following a sharp rise in energy prices caused by the Iran war.

Inflation inertia remains challenge

Şimşek said inflation had shown more persistence than the government’s economic model had anticipated, citing strong backward indexation in rents, education and wages.

He said exchange-rate pass-through in Türkiye was between 30% and 40%.

“There is no change in the direction or framework of our policies,” Şimşek said, adding that the government’s targets were largely on track.

Earlier this month, the government unveiled an updated Medium-Term Program (MTP), which projects a year-end inflation of 28.4%, compared to 16% estimated last year.

Officials said the war in the Middle East had played a key role in the upward revision.

Inflation is projected to fall to 21% next year, 13.5% in 2028 and 9% in 2029, according to the MTP.

Şimşek said disinflation does not mean prices are falling, but that the pace of price increases is slowing.

Şimşek said monetary policy had been more effective in reducing core goods inflation. Services inflation had also begun to respond, although it had initially shown considerable inertia, he added.

Without the war, year-end inflation would have been around 21% to 22%, Şimşek said, adding that the timeline initially envisaged by the government could be extended somewhat.

“Cost-of-living pressures are our biggest priority,” he said, adding that the government would not abandon disinflation during the election process because it was necessary for sustainable growth.

The next elections in Türkiye are scheduled for May 2028.

Authorities have been pursuing tight monetary and fiscal policies to balance domestic demand and combat high inflation, putting pressure on economic growth.

The Central Bank of the Republic of Türkiye (CBRT) has kept its benchmark policy rate at 37% in the last four policy meetings as ⁠it monitors Iran war fallout.

Fiscal targets remain on track

Şimşek said the Medium-Term Program had two main functions: serving as a binding policy commitment for the government, particularly in budgetary terms, and providing a road map for the private sector.

He said the government had maintained its policy framework for three years and had performed better than its target for the budget deficit as a share of gross domestic product.

Türkiye this year launched a sliding-scale tax adjustment system, implemented to limit the impact of rising oil prices and inflation on ⁠consumers. Authorities last month removed diesel from ⁠the system, while gasoline and liquefied petroleum gas (LPG) will remain until Oct. 1, when the mechanism is ⁠set to be abolished.

The government gave up significant tax revenue with the system, said Şimşek. Despite this, the government expects the budget deficit to reach 3.1% of GDP, compared with a target of 3.5%, he added.

Türkiye had removed a special consumption tax on diesel until the end of August and reinstated it this month. The tax will rise incrementally by TL 3 each month until it reaches about TL 13.1 per liter on Jan. 1, the same level as before the removal.

Şimşek said the government had achieved many of its targets under the Medium-Term Program, including the gradual exit from foreign-exchange-protected deposits. He also said reserves were no longer a major concern and that growth remained moderate but reasonable compared with the global economy.

Flexible exchange rate regime not currently possible

Şimşek said Türkiye’s normal preference was a floating exchange rate regime, but current market conditions did not allow for a more flexible approach.

He said sustained demand for the Turkish lira could lead to excessive appreciation if the currency were left entirely to market forces, while intervention could create pressure in the opposite direction.

“A more flexible exchange-rate regime could be considered once inflation reaches single digits,” Şimşek said, adding that current conditions did not permit such a move.

He warned against reducing all economic discussions to the exchange rate, saying the government would pursue a comprehensive approach focused on reforms and productivity.

Türkiye does not face a problem securing raw materials, he said, but energy markets remained highly sensitive, particularly for oil and natural gas derivatives.

New support for manufacturers

Şimşek said access to finance remained a key issue for the real sector and that the government was providing substantial targeted support while taking competitiveness into account.

The average interest rate on loans provided to farmers is 12%, he said, adding that the government covers 70% of the interest cost for nearly 1 million farmers.

The government has also increased rediscount loans and provided significant export-related support to manufacturers, Şimşek said.

The capital of Türkiye’s Eximbank has been increased sevenfold, allowing it to provide $60 billion in loans this year, he added.

Since the end of 2023, the government has identified 284 products eligible for investment support. Companies producing these products can access investment loans with maturities of up to 10 years and a total planned size of TL 750 billion, Şimşek said.

He also said monthly wage support of nearly TL 5,000 per employee was being provided in several sectors.

The government will introduce working-capital support for the manufacturing industry, beginning with TL 250 billion this year and potentially increasing the amount later, Şimşek said.

He added that targeted policies were being used to ease pressure on the real sector without undermining the broader monetary-policy framework.

No election economy

Şimşek rejected claims that the government would adopt an election-driven economic policy.

“Those who say we will implement an election economy have either not read the Medium-Term Program or do not understand mathematics,” he said.

He added that the government had met its budget targets over the past three years and had often performed better than planned.

The government has largely completed housing projects in the southeastern region struck by devastating earthquakes in early 2023 and plans to build 750,000 social housing units annually over the next few years, Şimşek said.

About TL 250 billion will be allocated for the program in the budget, he added.

Tax revenues expected to rise in 2027

Şimşek said there were no plans for new indirect tax measures beyond efforts related to corporate income tax, personal income tax and balancing the current account.

The number of income taxpayers has increased to 5.5 million as part of the government’s campaign against the informal economy, Şimşek said.

Tax revenues are expected to increase in 2027 due to GDP growth, the assumption that the sliding-scale mechanism will not continue and further efforts to combat informality, he added.

Net exports the only drag on growth

Şimşek said growth had slowed relatively in recent years but remained in line with the global economy.

Türkiye is growing 1.5 to two times as fast as its trading partners, he said, adding that the government’s economic program had contributed to the slowdown but was designed to ensure more sustainable growth.

Growth is still expected to reach 3.3% this year, according to Şimşek. The economy expanded 2.3% year-over-year in the second quarter, following a 2.6% expansion in the first ⁠three-month period.

The war has been the biggest global shock since the 1970s and has lasted for an extended period, affecting investment decisions, Şimşek said.

External conditions are currently having a significant impact on growth, he added, stressing the importance of balanced, high-quality and sustainable expansion.

“Net exports are the only factor pulling growth down,” Şimşek said.

Türkiye’s central bank governor warned Wednesday that energy shocks could have longer-lasting effects on inflation if cost pressures spill over into wages and prices, saying repeated supply disruptions could make it harder for policymakers to contain price increases.

Central banks could limit the initial impact of energy shocks through timely and restrictive measures, but second-round effects require close monitoring, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told a summit in Budapest.

Since the United States and Israel launched attacks on Iran in late February, fears of supply disruption have pushed oil prices sharply higher, with the surge in energy costs feeding into fuel and transport prices and lifting global inflation expectations.

Attacks since late August on military, shipping and energy assets across the Middle East have sent oil prices back above $100 a barrel and revived fears about a wave of price hikes.

That price outlook, coupled with the relentless surge in energy costs, has bolstered market bets for rate hikes by the world’s biggest central banks.

Karahan said central banks are accustomed to economic disruptions, adding that the shocks currently affecting the global economy were lasting longer than in previous periods.

Energy shocks, inflation

The global production structure has changed significantly over the past 20 to 30 years, as companies built extensive supply chains and countries became more economically interdependent, said Karahan, as cited by the Turkish media.

These links need to be properly assessed during periods of change, he noted, particularly as energy-related supply shocks pass through to inflation.

While initial price effects could be contained through policy measures, the process could become more complex if shocks affected wages, pricing behavior and inflation expectations, Karahan said.

He added that successive supply shocks could make inflationary pressures more persistent and increase the need for longer-term policy solutions.

Second-round effects could entrench inflation

Karahan said central banks should focus not only on the initial movement in prices but also on the impact of supply shocks on inflation expectations and pricing behavior.

Well-anchored inflation expectations give central banks greater room to respond to first-round effects, he said. However, controlling the impact becomes more difficult when shocks spread to wages, prices and exchange rates.

The risk is particularly significant for emerging markets, where external shocks can have a stronger impact on exchange rates if inflation expectations are not sufficiently anchored, he said.

Tighter monetary policy may be needed

Karahan said geopolitical tensions in the Middle East were creating upward pressure on energy prices.

A tighter monetary policy stance could be one of the tools used to limit the risk that deterioration in the inflation outlook becomes permanent, he said.

Fiscal policy could also help soften the initial impact of energy shocks on prices, Karahan added, saying monetary and fiscal policies could support each other during such periods.

Gold, dollar demand

Karahan said growing fragmentation in the global economy was affecting central banks’ reserve-management decisions.

Gold has distinct characteristics as a commodity, financial asset and reserve instrument, he said, adding that central banks had recently increased their focus on gold.

However, this did not mean that the dollar’s dominant position in the international monetary system would change rapidly, Karahan said.

The dollar’s deep and highly liquid markets continued to support its position in the global reserve system, he added.

Geopolitical risks, financial pressures and uncertainty over market access were also influencing reserve preferences, while central banks’ demand for gold remained strong, Karahan said.

Reserve management

Reserve management has traditionally been based on three factors – security, liquidity and return – but access should now be added to that framework, Karahan said.

Some reserve assets considered liquid under normal conditions may not be equally accessible during periods of market stress, he noted.

As a result, the total size of reserves is not the only relevant measure. Their practical usability when needed is also important, he said.

Rising gold prices

Karahan said gold had long played an important role in Türkiye’s financial system and remained one of the main savings instruments for households.

A significant amount of gold is held physically outside the financial system, while gold deposits also represent an important part of the banking system, he said.

The central bank supports balance in the gold market through reserve requirements, swap transactions and other measures, Karahan added.

Higher gold prices can increase the value of reserves and gold’s share of total reserves, but this does not mean that available liquidity rises by the same amount, he said.

“The more important question is not how much we have, but how much of what we have we can use, particularly under stress scenarios,” Karahan said.

Karahan said global economic integration had boosted efficiency and created disinflationary effects for many years.

However, as economic ties increasingly became part of geopolitical competition, policymakers could no longer assume that the conditions of the previous period would continue unchanged, he said.

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Annual inflation in the U.K. accelerated in August as the conflict in the Middle East continued to pose upward pressure on fuel prices, official data showed Wednesday.

The consumer price index (CPI) rose 3.1% in the 12 months to August, up from 2.9% the previous month, the Office for National Statistics (ONS) said.

Higher inflation adds pressure on Prime Minister Andy Burnham and Treasury chief John Healey to ease the cost of living for households ahead of the Labour government’s budget update next month.

The Bank of England (BoE) is forecast to maintain its benchmark interest rate at 3.75% on Thursday as the U.K. economy struggles for growth.

To tackle persistently high consumer prices, the U.S. Federal Reserve (Fed) is expected to lift borrowing costs on Wednesday, following a similar move by the European Central Bank (ECB) last week.

With central bank interest rates on the rise – and government bond yields reaching multidecade highs in recent weeks – Healey has pledged to maintain strict fiscal discipline.

But he has not been drawn on whether this means his budget on Oct. 28 will include new tax rises.

Analysts expect inflation to rise toward the end of the year as higher energy costs feed through to bills further, with little sign of a deal to end the Middle East war.

“With the situation in the Middle East looking increasingly fraught, the expectation is that inflation will continue to climb higher until the end of the year at a minimum,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

“For the government, today’s figures are a kick in the teeth for an administration that wants to make easing the cost of living its central mission,” he added.

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Diesel prices in Türkiye reached a record high of just under $2 per liter Tuesday, as the war in the Middle East tightens fuel supplies and Ukrainian strikes target Russian refineries.

Currency volatility and increases in the special consumption tax are also putting pressure on fuel prices.

The latest TL 6.5 hike Tuesday pushed diesel prices above TL 95 per liter ($1.87) in Istanbul. Prices reached as high as TL 96.75 in the capital Ankara and TL 97.02 in Türkiye’s third-largest city, Izmir.

Diesel had been selling for around TL 54.40 per liter in September 2025, meaning prices have risen by approximately 76% over the past year.

Prices are now almost 60% higher than they were before the U.S. and Israel attacked Iran in late February, when they stood at around TL 60.30 per liter.

Prices at the pump for diesel and regular gasoline closely follow those of crude oil. And oil has renewed its rise recently.

Last week, both Brent, the international standard, and U.S. crude surpassed $100 a barrel for the first time in months as fighting between the U.S. and Iran escalated again.

Brent crude futures were up 6 cents at $105.74 a barrel at 1301 GMT Tuesday after hitting a session high of $108.43. U.S. West Texas Intermediate futures were up 27 cents at $101.66 a barrel after ​rising as far as $104.21 earlier.

Türkiye had removed a special consumption tax on ​diesel until the end ‌of August and reinstated it this month. The tax will rise incrementally by TL 3 ​each month until it reaches about TL 13.1 per litre on Jan. 1, ​the same level as ​before the removal.

Authorities last month also removed diesel ‌from ⁠Türkiye’s sliding-scale tax adjustment system, implemented to limit the impact of rising oil prices and ​​inflation on ⁠consumers.

Gasoline and liquefied ​petroleum gas (LPG) will remain ​in ⁠the system until Oct. 1, when the system is ⁠set ​to be abolished.

Media reports, citing industry sources, said diesel prices could rise by a further TL 2.5 to TL 3 per liter as soon as Wednesday unless additional measures are taken.

The expected increase would push at least one fuel product above the TL 100 threshold for the first time.

Diesel prices are expected to exceed TL 100 in 45 provinces following the potential increase, while prices in major cities such as Istanbul, Ankara and Izmir could approach TL 98 per liter.

Higher diesel prices mean more expensive transportation for a long list of everyday goods. That’s because diesel is used for many freight and delivery networks, which could see businesses pass along steeper costs to consumers.

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UniCredit CEO Andrea Orcel is apparently pushing for a clean sweep as the Italian lender moves toward taking over Commerzbank, with a report saying Tuesday he wants Bettina Orlopp out as CEO and opposes Berlin holding on to two supervisory board seats.

UniCredit also wants Commerzbank Chair Jens Weidmann to leave, Reuters reported, citing sources with knowledge of the matter.

German Finance Minister Lars Klingbeil and Orcel met Monday on the Italian bank’s takeover plans, a turning point in the two-year battle for control of one of Germany’s biggest banks after Berlin failed ⁠in ⁠its attempt to stymie a takeover. Both called the meeting “constructive.”

UniCredit did not respond to a request for comment.

A spokesperson for Commerzbank dismissed any changes in management, saying “The board of Commerzbank AG has running contracts, the supervisory board is elected by the general assembly, and there’s full alignment on strategy.”

Germany’s Finance Ministry declined to comment further, after saying Monday it wants to keep two board seats.

It was unclear if the leadership roles or UniCredit’s opposition to the German government maintaining ⁠two board seats were discussed at Monday’s meeting in Berlin.

“We are currently represented on Commerzbank’s supervisory board and will continue to be,” Klingbeil told reporters Tuesday, adding: “And, naturally, if and when the time comes, we also expect to be represented on UniCredit’s board.”

New shareholder representatives

Orlopp said last month she was not feeling pressure to give up her role ​after the months-long ownership battle over Germany’s second-largest bank, which both ​the Commerzbank CEO and Weidmann have said should remain independent.

Orcel repeatedly said over the summer he wanted to engage with Commerzbank employee representatives, local authorities and central government, leaving out ⁠Orlopp and Weidmann.

UniCredit is in a position to call an extraordinary shareholder meeting and appoint new shareholder representatives at Commerzbank, he said.

Germany won the right to appoint two board members when it rescued Commerzbank in 2009 during the global financial ​crisis.

It retains a stake of 13.3% and it is not clear how UniCredit could block Berlin from retaining two ​members while it remains a shareholder.

In addition to the board seats, Berlin has set out a number of other demands relating to a UniCredit takeover, including Commerzbank remaining listed on the ⁠stock exchange, ‌keeping its base ‌in Frankfurt and continuing to finance German medium-sized companies at home and ⁠abroad.

After months of resistance, German government officials and Commerzbank executives ‌softened their stance on a potential deal after UniCredit amassed a stake of nearly 50%.

Now German officials are hoping to protect ​jobs as well as the brand of ⁠a bank that plays a critical role in financing the medium-sized companies ⁠in Europe’s largest economy, whose government is in the throes of a political crisis.

A combination of ⁠UniCredit and Commerzbank would ​create a bank with more than 1.3 trillion euros ($1.5 trillion) in assets across two of the eurozone’s largest economies.

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The Trump administration is redirecting tens of millions of dollars in U.S. military assistance away from countries in Europe and the Middle East, steering the funds toward conservative-led governments in Central and South America as Washington reshapes its foreign aid priorities.

The State Department on Tuesday notified Congress that it will reprogram $52 million in foreign military financing from Slovakia, North Macedonia, Tunisia and Iraq to Panama, Peru, Ecuador and Colombia.

Secretary of State Marco Rubio visited Colombia, Ecuador and Peru last week and pledged them additional support as the Trump administration has prioritized the Western Hemisphere in its foreign policy with an emphasis on combating drug trafficking and illegal immigration.

Foreign military financing provides recipient countries with U.S. taxpayer dollars to allow them to purchase military equipment from American defense contractors.

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