Conditional Branches from the Published Assumption Set
ABSTRACT
The Central Bank’s May 2026 forecasts of 26, 15 and 9 percent rest on a specified assumption set dominated by oil prices. This simulation maps three branches conditional on the oil path, identifies the contract indexation lag that concentrates risk in 2027, and states the identifying assumptions and failure conditions explicitly.
1. Purpose and method
This is a conditional mapping exercise, not a forecast. It takes the Central Bank’s published baseline and assumption set as given, varies a single identified driver, and traces the implication for the announced path. It does not assign probabilities to the branches, does not estimate a structural model, and does not incorporate information unavailable in the published documents. Its value lies in making explicit which assumption carries the path and where in the sequence the risk concentrates.
2. The published baseline
The Inflation Report of 14 May 2026 sets year-end inflation forecasts at 26 percent for 2026, 15 percent for 2027 and 9 percent for 2028, with stabilisation around the 5 percent target in the medium term. Interim targets were raised to 24 percent for 2026, 15 percent for 2027 and 9 percent for 2028, from 16, 9 and 8 percent respectively in the February report.
Two features of the communication are analytically relevant. The Bank suspended its forecast-range communication in favour of point estimates, citing elevated uncertainty, which removes the interval the market had previously used to gauge confidence. And the interim target revision was justified by extraordinary geopolitical developments, invoking a clause the Bank had previously stated would be used only in exceptional circumstances.
3. The identifying assumption set
The baseline rests on the following published assumptions. Brent crude averaging 89.4 dollars per barrel in 2026 and 75.4 dollars in 2027. Import unit values rising 6.3 percent on annual average in 2026 and falling 0.2 percent in 2027. End-2026 food inflation of 26.3 percent, revised up from 19 percent, and end-2027 food inflation of 19 percent, revised up from 11 percent. An export-weighted global growth index of 1.7 percent for 2026 and 2.5 percent for 2027, revised down on the deterioration in external demand following the Middle East conflict.
The oil assumption carries the others. Import unit values are dominated by energy; food inflation transmits fertiliser, fuel and logistics costs; external demand reflects the global growth consequences of the energy shock. A single variable therefore propagates through most of the assumption set, which is what makes a one-variable branching exercise informative rather than simplistic.
4. Branch A: energy normalisation
Condition: Brent returns below 75 dollars per barrel during the second half of 2026, with European gas hub prices following, consistent with a resolution or containment of the Hormuz disruption.
Under this branch the published assumption set holds or improves. Import unit values undershoot the 6.3 percent assumption, food inflation moderates through fertiliser and logistics costs, and the currency faces reduced pressure from the trade balance. The 2027 target of 15 percent becomes attainable through the ordinary disinflation channel of tight policy, moderating expectations and a favourable base.
The observable early indicators for this branch are the Brent forward curve beyond twelve months, the TTF hub price, and the monthly energy import bill in the foreign trade statistics.
5. Branch B: sustained disruption and the 2027 concentration
Condition: prices remain at or near May 2026 levels through 2026 and into 2027.
This branch is more damaging than the arithmetic of 2026 suggests, because of a contract structure that operates with a lag. On a volume-weighted basis at the end of 2025, Turkish gas import contracts were approximately 60 percent indexed to hub prices and 40 percent to oil, with oil price movements transmitting into contract prices after roughly nine months.
The consequence is a two-stage shock. Stage one, in 2026, comprises the hub-indexed pass-through and the direct oil bill: an estimated 6.4 billion dollars of additional gas cost and 7.7 billion of additional oil cost, totalling more than 14 billion dollars, or roughly 30 percent of the annual energy import bill. Stage two, in 2027, comprises the oil-indexed gas pass-through, which on sustained prices raises additional gas import costs toward 13 billion dollars.
The timing is the problem. The published path requires inflation to fall from 26 percent at end-2026 to 15 percent at end-2027, the steepest single-year decline in the sequence. Stage two arrives during that year. Transmission runs through three channels: the current account and therefore the exchange rate; administered energy prices for households and industry; and inflation expectations, which the Bank’s own reporting identified as having deteriorated following the conflict.
This branch breaches the 15 percent figure through cost and exchange rate channels rather than through excess demand, which is significant because it implies that demand-side tightening addresses the symptom at high output cost rather than the cause.
6. Branch C: compression
Condition: Branch B conditions obtain and the authorities hold the announced path.
Holding a cost-driven inflation path requires suppressing domestic demand sufficiently to offset imported price pressure. The instruments are higher real policy rates, tighter macroprudential limits on credit growth, and fiscal restraint. The trade-off is explicit: the inflation target is purchased with output and employment.
Two features of the current position affect the cost of this branch. Non-financial corporations carried a net short foreign currency position of 189 billion dollars at end-2025, up from 148 billion, so exchange rate depreciation and high domestic rates squeeze the corporate sector from both sides simultaneously. And the earthquake reconstruction programme and defence industrial expansion are both import-intensive and both largely insulated from demand compression, so the adjustment falls disproportionately on private consumption and non-priority investment.
7. Failure conditions and limitations
The mapping fails under any of the following. A material change in fiscal stance, since the baseline assumes the announced fiscal path. A change in the minimum wage or public sector wage settlement beyond that embedded in the assumption set, since wage indexation is a principal transmission channel not varied here. A change in the administered price adjustment schedule, which can shift measured inflation between periods without changing underlying cost. A supply shock originating outside energy, agriculture being the most likely candidate given the drought record. Or a disorderly move in the exchange rate driven by capital flows rather than by the trade balance.
The exercise also has structural limits. It varies one driver and holds others at baseline, whereas the drivers are correlated. It uses point estimates because the Bank has suspended range communication, which removes any basis for stating confidence. It says nothing about the probability of each branch. And it treats the pass-through coefficients as stable, whereas pass-through from import prices to consumer prices varies with the state of demand.
8. Conclusion
The published disinflation path is carried by a single assumption about oil prices, and the risk it faces is concentrated in 2027 rather than 2026 because of a nine-month indexation lag in gas contracts. That is the operative finding of this exercise: the year in which the path requires its steepest fall is the year in which the delayed component of the energy shock arrives. Monitoring should therefore prioritise the Brent forward curve, the hub–oil indexation weight in contract renewals, and the administered price schedule, in that order.
SOURCES
Central Bank of the Republic of Türkiye, Inflation Report 2026-II, 14 May 2026, including the medium-term outlook chapter and assumption set.
Central Bank of the Republic of Türkiye, Inflation Report 2026-I, February 2026, for the superseded interim targets and forecast ranges.
Ember (2026) ‘Hormuz crisis could cost Türkiye $14 billion’, 12 June 2026, contract indexation weights and lag structure.
Banks Association of Türkiye, Economic Developments and the Banking System 2025, corporate foreign currency position.
TÜİK, consumer price index and foreign trade statistics series, 2026.
Furkan Mahmut Tameroglu