Turkey Holds Interest Rates at 37% as Inflation Risks Persist

The Central Bank of the Republic of Turkey kept its key interest rate unchanged at 37% on Wednesday, extending its cautious monetary stance for a second consecutive month as inflationary pressures continue to weigh on the economy.

The decision follows the bank’s move in March to halt a monetary easing cycle that had begun in late 2024, amid market disruptions linked to escalating geopolitical tensions in the Middle East, particularly the Iran conflict and its ripple effects on energy prices.

In addition to holding the benchmark rate steady, the central bank maintained its overnight lending rate at 40% and the borrowing rate at 35.5%, signaling a continued commitment to tight monetary conditions.

The policy shift comes despite earlier expectations that Turkey would proceed with gradual rate cuts. However, rising energy costs, driven by regional instability, have complicated the outlook for an import-dependent economy like Turkey, even as inflation eased to 30.87% last month.

In its post-meeting statement, the central bank noted that the underlying trend in inflation showed signs of moderation in March, while preliminary indicators point to a slight uptick in April. It emphasized that energy prices remain elevated and volatile, reflecting ongoing geopolitical developments, and warned that these factors could continue to influence both inflation and economic activity.

The bank also highlighted signs of slowing economic growth but stressed the importance of closely monitoring indirect effects stemming from recent global developments. It reiterated that a tight monetary policy stance would support disinflation through multiple channels, including domestic demand, exchange rates, and market expectations.

Looking ahead, the central bank indicated that future interest rate decisions will be guided by actual and expected inflation trends, ensuring that policy remains sufficiently restrictive to meet its targets. Policymakers reaffirmed their commitment to a data-driven approach, with decisions evaluated on a meeting-by-meeting basis.

Earlier this year, the bank maintained its medium-term inflation target at 16% by the end of 2026, while widening its forecast range to 15%–21%. Turkish Finance Minister Mehmet Şimşek acknowledged that recent developments are likely to impact inflation but expressed confidence that the broader downward trend will persist.

He also warned that the current account deficit could widen due to higher oil prices, though he described the impact as temporary. Meanwhile, the central bank reaffirmed its readiness to tighten monetary policy further if inflation expectations deteriorate significantly, underscoring its focus on managing upside risks and maintaining financial stability.