The ongoing conflict in the Middle East has significantly disrupted expectations surrounding interest rate decisions by Türkiye’s Central Bank, as rising energy and transportation costs quickly feed into global inflation
With the war putting upward pressure on oil, natural gas and commodity prices since late February, both domestic market participants and major international banks have pushed back their expectations for rate cuts by the Turkish Central Bank by at least two months.
Following the escalation of tensions beginning on Feb. 28, the sharp volatility and increases in energy and commodity prices prompted the Turkish Central Bank to take precautionary measures to mitigate risks to the inflation outlook.
The bank suspended one-week repo auctions in March and moved towards monetary tightening through liquidity tools, shifting its funding to the upper band of the interest rate corridor at 40 percent. During this period, the bank held its policy rate steady in both March and April, maintaining a firm tightening stance.
According to the bank’s May 2026 Market Participants Survey, expectations for rate cuts have now been delayed until the autumn.
Markets anticipate the policy rate — currently at 37 percent — to remain unchanged at the Monetary Policy Committee (MPC) meetings on June 11 and July 23, with the first rate cut of 100 basis points expected in September.
The shift in expectations follows the bank’s recent upward revision of its inflation forecasts.
Speaking during the bank’s second inflation report presentation of the year on May 14, Central Bank Governor Fatih Karahan announced that the 2026 interim inflation target had been raised from 16 percent to 24 percenr, while the year-end inflation forecast for 2026 was set at 26 percent.
Major international financial institutions have also adjusted their outlooks. Deutsche Bank revised its forecast for the start of rate cuts from July to September.
Citi similarly expects the bank to hold rates steady in June, citing persistent inflationary pressures and exchange rate policy. Citi also noted that the suspension of one-week repo auctions effectively amounted to a 300 basis point tightening in monetary conditions.
The survey also highlights a growing divergence between the Central Bank’s projections and market expectations. The expected May monthly CPI increase rose from 1.82 percent to 1.89 percent, while the year-end inflation expectation climbed from 27.53 percent to 28.94 percent.
Speaking at a meeting with business representatives in Konya on 15 May, Karahan emphasized that inflation would ultimately be shaped by the policy stance maintained over the medium term.
He reiterated the central bank’s commitment to tight monetary policy, stating that recent developments are being closely monitored for their impact on inflation.
Karahan added that, “If there is a clear and persistent deterioration in the inflation outlook, the monetary policy stance will be tightened further.”
