Turkish central bank holds, keeping an eye on inflationary risks
The desk interprets the Central Bank of Turkey's recent decision to maintain its policy rate at 37% as a balancing act between moderating inflation and supporting economic growth. Per the full note from ing-think, while this decision shows a commitment to flexibility, the central bank is keenly aware of the underlying inflation risks and subdued domestic demand. The cautious approach amid rising borrowing costs reflects a broader trend where they aim to mitigate excess liquidity while observing GDP slowdown indicators. Currently, with no upcoming high-impact events for Turkey, traders should heed the economic data for any significant shifts in sentiment and market positioning.
What the desk is arguing
The Central Bank of Turkey's choice to hold the policy rate steady at 37% indicates a cautious approach to managing inflationary pressures in a notably weak economic environment. According to ing-think's analysis, the bank is particularly focused on providing a stable footing as it acknowledges a slowdown reflected by a mere 2.5% year-over-year growth in GDP for the first quarter.
Supporting this stance, the CBT emphasized a cautious monitoring of inflation and economic activity, highlighting a decline in underlying inflation while pointing to geopolitical risks that may influence future policy adjustments. Continued high borrowing costs and reduced loan growth caps signal possible economic headwinds ahead as the bank attempts to navigate between tightening and supporting the economy.
Where it sits in our coverage
Our consensus target for the Turkish lira against the US dollar is set at 1.075 with a range of 1.04 to 1.12, reflecting current market sentiments. Noteworthy firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's analysis aligns with jpmorgan, which anticipates a cautious stance, while bofa presents a more conservative target reflecting greater bearish sentiment.
How other firms see it
Groups with an optimistic outlook, like jpmorgan, foresee a slight appreciation in the lira, while those such as bofa appear to retain a bearish sentiment. This divergence signifies contrasting responses to Turkey's ongoing economic volatility and central bank policy initiatives.
Traders should keep an eye on the USD/TRY pair to anticipate potential shifts driven by ongoing inflation indicators and central bank communications. Clarity on macroeconomic conditions remains integral for defining future price trajectories in this pairing.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Central Bank of Turkey holds the policy rate at 37%, indicating a balance between inflation management and economic support.
- 02GDP growth has slowed to 2.5% YoY, with underlying inflation showing slight declines yet fraught with geopolitical risks.
- 03Market consensus targets for USD/TRY reflect both caution and divergence among institutional firms regarding Turkey's economic outlook.
- 04No immediate high-impact events in Turkey's calendar to influence market movements in the near term.
Market implications
Traders should closely monitor the USD/TRY exchange rate for signs of shifts in market positioning, especially in light of the current policy stance. A break above 1.12 could signal increasing bearish sentiment, while a drop towards 1.04 may indicate improved confidence in Turkish economic fundamentals.
Risks to this view
Significant geopolitical developments or an unexpected spike in inflation could drastically alter the Central Bank's approach, prompting a reconsideration of the current policy stance. Additionally, further economic indicators showing deeper recession risks may compel the CBT to adopt a more aggressive stance, impacting lira valuation.
Older quick take Quick take 13:04 Turkey Turkish central bank holds, keeping an eye on inflationary risks Turkey's central bank held the policy rate unchanged at 37%, which implies that it finds the current stance sufficient. While the decision signals a clear intention to preserve flexibility, the bank has remained cautious, being attentive to inflationary risks Fatih Karahan, Governor of the Central Bank of Turkey Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Muhammet Mercan Chief Economist, Turkey At its June rate‑setting meeting, the Central Bank of Turkey (CBT) maintained its policy rate (1-week repo rate) at 37%, and kept the interest rate corridor stable at 450 basis points, with the upper and lower bands remaining at 40% and 35.5%, respectively. Ahead of the meeting, there were two likely moves from the CBT: holding the policy rate flat and continuing to provide funding from the upper band of the interest rate corridor, or raising the policy rate to the current effective cost of funding level with a 300bp hike in the corridor structure as, according to the governor, they normally do not prefer a prolonged wide gap between these two rates.
The market consensus, and ING's position, leaned towards the first option, with few calls for the latter. We think the CBT has continued to keep an eye on both the growth and inflation outlook; the bank acknowledged that first quarter GDP points to a slowdown in economic activity (to 0.1% QoQ and 2.5% YoY), while recent leading indicators imply continued domestic demand weakness. Accordingly, elevated borrowing costs, the expectations that interest rates will remain higher for longer, and the most recent CBT step toward a stricter macroprudential framework by further reducing loan growth caps may translate into a more marked slowdown this year.
The CBT also acknowledged the slight decline in underlying inflation in May, while emphasising ongoing risks to the outlook on the back of geopolitical developments and high and volatile energy prices. So the bank has remained cautious and “highly attentive to upside risks” given that the war has driven an upward shift in inflation expectations as the current backdrop increases the risk of second-round effects. According to the market participants' survey in May, the expectations for 2026 and 2027 rose significantly to 28.9% and 21.1%, respectively.
The expectation for the next 12 and 24 months, on the other hand, deteriorated to 23.8% and 18.4%. While domestic demand growth weakness likely extends the CBT's patience, other drivers that support its June rate decision are no signs of retail FX dollarisation, recent stability in gross reserves and net reserve position. Regarding the forward guidance, the CBT also continued to signal that the current monetary policy stance will be maintained in the near term.
It reiterated a prudent meeting‑by‑meeting approach and is keeping the door open to further tightening if needed. It also kept the messages regarding the macroprudential framework and liquidity management unchanged, indicating that a cautious approach in these areas would be preserved. Overall, all policy options continue to be available to the CBT.
This approach signals a clear intention to preserve flexibility in policymaking depending on changing geopolitical conditions. In the near term, we think the CBT will remain in a wait‑and‑see mode before deciding whether to reduce the effective cost of funding back towards the policy rate. A possible deal in the US-Iran conflict in the summer will likely create room for the bank to normalise the effective funding rate depending on inflation and reserve dynamics.
Currently, we see end-year inflation slightly below 30% and the one-week repo rate at 35%, with risks tilted to the upside. Turkey Policy Rate Monetary Policy Inflation Central Bank Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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