Central Bank of Turkey stays on hold, citing geopolitics
The Central Bank of Turkey (CBT) has opted to hold its key interest rate at 37% amid escalating geopolitical risks and rising inflation driven by surging oil prices, as highlighted in the recent research note. This decision demonstrates the bank's cautious approach against a backdrop of financial stability concerns that have emerged following renewed geopolitical tensions. Notably, the price of oil is nearing $100 per barrel, up from $70-$75 previously, pressing inflation risks higher ('Per the full note source...'). The market remains attuned to potential policy shifts, particularly regarding Turkey's liquidity tools, which could impact funding costs down the line, contingent on geopolitical developments.
What the desk is arguing
The CBT's decision to maintain the policy rate reflects ongoing geopolitical uncertainties and inflationary pressures, particularly in energy markets. According to the note, the bank cited these rising risks as its rationale for inaction, despite earlier expectations of potential easing in response to improved macroeconomic indicators.
With oil prices recently climbing due to tensions in the Gulf region, the bank's shift towards a cautious stance may dampen near-term easing expectations and keep the effective funding cost elevated at around 40%.
Where it sits in our coverage
Our consensus target for the USD/TRY stands at 1.075, with a range between 1.04 and 1.12, reflecting the varied outlooks from different firms on the currency's trajectory. Target expectations include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
The desk's view aligns with jpmorgan, which also emphasizes a cautious approach amidst prevailing geopolitical tensions, positioning us closer to the higher end of the spectrum.
How other firms see it
Firms like jpmorgan favor a cautious outlook citing financial stability risks, whereas bofa holds a contrary position anticipating a more aggressive easing cycle. Such discrepancies illustrate how geopolitical uncertainties create a divergence in exchange rate forecasts among analysts.
Key currency pair movements to monitor include USD/TRY, as ongoing rate decisions and geopolitical developments could lead to significant volatility in the Turkish lira's valuation.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01CBT maintains 37% interest rate amid geopolitical tensions
- 02Oil prices approaching $100 pose inflationary risks
- 03Market expected potential easing, which now seems uncertain
- 04Financial stability concerns influencing policy decisions
Market implications
Market participants should closely monitor oil price movements as they could exacerbate inflationary pressures and impact central bank policy. A failure to stabilize energy prices could keep the CBT from easing, maintaining a high-rate environment.
Risks to this view
An unexpected spike in geopolitical tensions, leading to further surges in oil prices, could force the CBT to alter its policy framework. Conversely, if oil prices were to stabilize or decline significantly, it could pave the way for a reconsideration of easing measures.
Older quick take Quick take Published 13:00 Turkey Central Bank of Turkey stays on hold, citing geopolitics Turkey's central bank kept the policy rate unchanged, maintaining a cautious stance amid heightened geopolitical uncertainty and lingering inflation risks as oil prices rise again The Central Bank of Turkey in Istanbul Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Muhammet Mercan Chief Economist, Turkey At its July meeting, the CBT left its policy rate (the one-week repo rate) unchanged again at 37%. The interest rate corridor was also left unchanged, with the upper and lower bounds remaining at 40% and 35.5%, respectively, in line with expectations. As a result, the Bank will continue to fund through the upper bound of the corridor, as the repo window has remained closed since the start of the US-Iran conflict.
Before the recent flare-up of geopolitical tensions in the Gulf, the prevailing expectation was that the CBT would begin easing through its liquidity tools, allowing the effective cost of funding to fall from 40% to 37%, either gradually or through full normalisation. This view was driven by fading financial stability concerns and an improved macroeconomic outlook following the memorandum of understanding between the US and Iran. Reserves recovered markedly until the recent escalation, with the CBT purchasing around US$25bn in June and July combined, according to our calculations (adjusted for swaps and gold prices).
The recovery was supported by an increase in carry-trade positions and renewed portfolio inflows. The policy outlook has shifted in recent days, with rising geopolitical uncertainty pushing oil prices close to US$100 per barrel from the US$70-75 range seen during the ceasefire. In its MPC statement, the Bank maintained a cautious stance, citing the renewed rise in energy prices and the return of financial stability concerns.
The CBT has continued to keep an eye on both the growth and inflation outlook. The Bank acknowledged that recent leading indicators point to a continued weakening in domestic demand. Elevated borrowing costs, expectations that interest rates will remain higher for longer, and recent tightening in macroprudential measures seem to be translating into a more marked slowdown this year.
This should help limit the risk of broad-based second-round effects from higher energy prices. The CBT also acknowledged the slight decline in the underlying inflation trend in June, while highlighting a temporary rise in July as implied by leading indicators. In seasonally adjusted terms, a measure closely followed by the CBT, July inflation will likely rise back above 2%, moving closer to its average level over the past two years.
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