Global headwinds threaten Türkiye’s rate-cut path

Sefer Levent-ISTANBUL

Türkiye’s economy has spent the past three years pursuing a deceptively simple but difficult goal: Bringing down inflation, lowering interest rates and returning growth to a more sustainable path.

Treasury and Finance Minister Mehmet Şimşek and the economic management have built much of their strategy around that roadmap.

Yet, just as conditions appeared to be improving for further monetary easing, the global backdrop has begun to shift, and in two areas that matter most for Türkiye: Interest rates and oil prices.

The Turkish Central Bank’s policy rate currently stands at 37 percent. Markets are focused on August inflation data due on Sept. 3 and the Central Bank’s next rate-setting meeting on Sept. 10.

At the same time, the global conversation is moving in the opposite direction. Following hawkish remarks by Federal Reserve Chair Kevin Warsh at Jackson Hole, another U.S. rate hike has become a serious market possibility. As of Aug. 30, markets were pricing in a 56-60 percent probability of a September hike, down from as high as 66 percent a week earlier.

The Fed’s next policy meeting is scheduled for Sept. 15-16. Investors will be watching closely for signals on the central bank’s policy path.

Bond markets have already reacted. Yields on U.S. 10-year Treasuries have climbed to their highest level since January 2025, while Japan’s benchmark yield has reached a three-decade high. Long-term borrowing costs in Germany and France are also at their highest levels in more than 15 years.

In practical terms, global capital is becoming more expensive. For Türkiye, that matters because higher returns on U.S. government debt make it more difficult for emerging markets to attract investment.

Even if Türkiye’s risk premium declines, the yield required by investors continues to rise. As global rates move higher, domestic rate cuts become harder to deliver.

The second and more immediate risk is oil.

Unlike previous price spikes driven by general geopolitical tensions, the latest rally has been fueled by renewed confrontation between Iran and the United States.

The situation is particularly important for Türkiye, which remains heavily dependent on imported oil and natural gas.

Central Bank Governor Fatih Karahan highlighted persistently elevated energy prices as one of the main upside risks to inflation during the Inflation Report presentation on Aug. 13. The Central Bank recently raised its year-end 2026 inflation forecast to 28 percent, taking into account developments in energy and commodity markets.

Now, with the conflict escalating, oil prices have moved beyond that baseline scenario. If the increase proves lasting, economic assumptions may need to be revised.

Higher oil prices add to inflationary pressures while also increasing the country’s energy import bill and widening the current account deficit. Combined with rising global interest rates, the result is a backdrop policymakers would prefer to avoid.

The coming weeks will therefore be critical for Şimşek and the economic management.

The focus is no longer solely on Türkiye’s inflation trajectory. While policymakers in Ankara monitor domestic data, they must also watch developments in Washington, the Strait of Hormuz and the wider Gulf region.

Türkiye’s disinflation program has never been an easy undertaking. Now, the external environment is becoming less supportive. At a time when policymakers have begun looking for room to ease conditions, stronger global headwinds may force a more cautious approach. The brakes may come off, but more slowly than previously anticipated.