Turkish central bank stays on hold and signals continued caution
The Central Bank of Turkey's decision to hold rates steady at 37% reflects its cautious approach amid rising geopolitical concerns and inflation risks, particularly in light of increasing oil prices. Per the full note from ing-think, this indicates a clear prioritization of stability over aggressive monetary policy adjustments, especially after the previous liquidity easing. Our desk anticipates that external pressures, such as geopolitical tensions, will keep the CBT's policy rate within a narrow band for the near term, whilst expecting it to reach around 35% by the end of 2026. Despite recent improvements in underlying inflation pressures, the CBT remains vigilant, which should prompt traders to watch for shifts in sentiment around Turkish assets as these factors evolve.
What the desk is arguing
The Turkish central bank's decision to maintain its policy rate at 37% suggests a deliberate stance of caution as geopolitical worries persist. The bank's concerns over inflation fuelled by climbing oil prices, coupled with weak domestic demand, shape its current approach. According to the latest insights from ing-think, the central bank is keenly aware of the inflation forecast adjustment from 9% to 21%, heightening the uncertain landscape going forward.
The maintenance of the rate also underlines the bank's cautious optimism regarding domestic demand, though recent inflationary pressures challenge this outlook. Notably, while the bank narrowed the effective cost of funding to levels closer to the policy rate, it remains attentive to the shifting geopolitical dynamics that could impede the disinflationary trends expected in the mid-term.
Where it sits in our coverage
Our consensus target for the Turkish lira versus the US dollar stands at 1.075, with a wide range from 1.04 to 1.12. Notable firm forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This stance aligns closely with jpmorgan’s approach while contrasting with bofa’s more pessimistic view, which sits at the lower end of the range we monitor. Our expectations reflect the complexities presented by the CBT's current position without disregarding external risks.
How other firms see it
Aligned firms, including jpmorgan and others, generally share a consistent outlook that accommodates ongoing geopolitical and inflation challenges. In contrast, bofa presents a more cautious position, highlighting the potential for accelerated inflationary pressure that acts against stability.
Key indicators such as the USD/TRY currency pair and broader oil price trends will likely mirror the CBT's decisions, serving as critical components in positioning strategies moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Turkish central bank holds rates at 37%, prioritizing caution amid geopolitical risks.
- 02Inflation expectations have been increased significantly from 9% to 21%, complicating the economic landscape.
- 03Effective funding costs have been adjusted, yet demand remains subdued, reflecting control over inflation under current conditions.
- 04Market participants should closely monitor geopolitical dynamics and oil price movements that could influence Turkish monetary policy.
Market implications
Traders should focus on the implications of geopolitical developments on oil prices as they may further sway the CBT's policy stance. Additionally, keep an eye on USD/TRY for reflective moves as conditions evolve.
Risks to this view
The outlook could change dramatically if geopolitical tensions escalate leading to significantly higher inflation readings, or if the domestic demand unexpectedly accelerates, prompting a reconsideration of monetary policy and rate hikes.
Older quick take Quick take Published 13:40 Turkey Turkish central bank stays on hold and signals continued caution The Turkish central bank kept rates on hold, signalling continued caution amid heightened geopolitical uncertainty and growing inflation risks from rising oil prices We see the Central Bank of Turkey policy rate at 35% by the end of 2026 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Muhammet Mercan Chief Economist, Turkey In the September 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 with the upper and lower bands at 40% and 35.5%, respectively. The decision was widely expected and suggests the central bank remains concerned about geopolitical risks, despite easing underlying inflation pressures and subdued domestic demand. Last month, the CBT eased liquidity conditions, bringing the effective cost of funding down from the corridor's upper band to the policy rate.
The move was based on two arguments: that tensions between the US and Iran had begun to subside, and that weak demand was limiting the impact of cost pressures on inflation expectations and broader pricing behaviour. Ahead of today's meeting, the prevailing expectation was a hold given the limited time that had elapsed since its liquidity move. Additionally, recent developments have likely impacted the CBT decision, including renewed geopolitical tensions that have pushed energy prices higher and increased the risk of a rebound in September inflation, plus an adjustment in the government’s 2027 inflation forecast from 9% to 21%, implying a further disinflation pushback in the current stabilisation programme which launched in mid-2023.
Against this backdrop, the MPC opted to leave the policy rate unchanged. The CBT has continued to keep an eye on both the growth and inflation outlook. It expressed greater confidence that domestic demand remains weak, pointing not only to recent economic data but also to "the limited pass-through of supply shocks to domestic prices", the bank said in its statement.
This suggests that the CBT is confident that slowing economic activity has been instrumental in preventing broad-based second-round effects from the energy price shock. Additionally, in previous MPCs, the bank has provided its assessment of released inflation data and its expectation for the upcoming figure. In the September statement, it does not provide a specific analysis phrase but adds a general sentence that: “Despite monthly fluctuations, recent inflation figures and leading indicators suggest that the underlying trend of inflation is decelerating." Regarding the forward guidance, the CBT reiterated a prudent meeting‑by‑meeting approach and kept the door open to further tightening if needed.
In addition, it left the messaging around the macroprudential framework and liquidity management unchanged, indicating that a cautious approach in these areas would be preserved. Overall, the CBT has reiterated its narrative of improving underlying monthly inflation momentum, as higher rates and slower loan growth have weakened domestic demand, containing the indirect effects on inflation. Given this backdrop, we see the policy rate at 35% by the end of 2026, with two 100bp cuts in the last quarter of this year.
The key risks are the Middle East conflict and the inflation outlook, while the central bank will also continue to closely monitor demand conditions, international reserves and depositor behaviour to determine the pace of cuts. 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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