Turkey’s central bank opted to keep its benchmark interest rates unchanged on June 19, maintaining the one-week repo rate at 46 percent and the overnight lending rate at 49 percent, despite market expectations for a cut to correct the asymmetry in its interest rate corridor.
Analysts had anticipated a 150 basis-point cut to the overnight lending rate in order to bring it in closer alignment with the overnight borrowing rate, currently at 44.5 percent.
The central bank, however, signaled caution in the face of ongoing geopolitical instability, particularly the unresolved conflict between Israel and Iran, which continues to weigh on global markets and oil prices.
Read: UAE central bank holds interest rates steady, in line with U.S. Fed
Funding stabilizes around 46 percent
Since June 13, the central bank’s weighted average cost of funding has declined to 46 percent, after hovering at 49 percent between May 26 and June 5. Market rates, such as the Turkish Lira Overnight Reference Rate (TLREF), have also aligned in the 46 percent range.
The recent developments had led to stronger market expectations for an overnight rate cut. However, by holding rates steady, the central bank appears to be taking a defensive position amid heightened global risk and domestic inflation concerns.
The Turkish monetary authority often limits or suspends its one-week repo auctions, forcing banks into the overnight window to implement de facto monetary tightening via the interest rate corridor.
Inflation shows signs of cooling
In its policy statement, the Monetary Policy Committee (MPC) said that the underlying inflation trend declined in May, with early indicators pointing to a continued easing in June.
Consumer price inflation dropped to 35.41 percent year-on-year in May, down from 37.86 percent in April and 44 percent at the end of 2024, according to the Turkish Statistical Institute (TurkStat).
Still, the central bank warned that “geopolitical developments,” including the war between Israel and Iran and its impact on global oil prices, as well as rising protectionism in global trade, could hinder progress toward disinflation.
Inflation outlook and policy stance
The central bank has held its end-2025 inflation target at 24 percent, with the upper range of the forecast band remaining at 29 percent, as detailed in its quarterly inflation report released on May 22.
It projected a temporary uptick in seasonally adjusted monthly inflation in the first quarter of 2025, driven by wage hikes and annual price adjustments. However, the central bank expects inflation to fall below 1.5 percent monthly starting from the third quarter of 2025.
Central bank governor Fatih Karahan has stated that monthly inflation will end the year just above 1 percent. The next inflation report and updated forecasts will be released on August 14.
Political influence and selective lending
Domestically, president Recep Tayyip Erdoğan has expanded the Credit Guarantee Fund (KGF) and central bank loan programs (YTAK), providing “selective” financing channels to regime-aligned businesses.
These programs serve as alternative economic levers, reducing pressure on the central bank to cut rates amid tight monetary policy.
Market pressure and outlook
Turkey’s currency, the lira, remains under pressure, with the USD/TRY pair hovering in the 39s. The central bank has reportedly drawn on reserves to maintain stability in the currency amid escalating regional tensions.
The next policy decision is scheduled for July 24. Much will depend on whether the geopolitical climate stabilizes and how inflation and market funding costs evolve over the next month.
