Monetary Policy Under Pressure: Ankara Pauses Interest Rate Cuts for Now

In light of growing geopolitical uncertainty, the Turkish Central Bank has decided not to lower its key interest rate further for the time being. On March 12, the Monetary Policy Committee decided to keep the one-week repo rate at 37 percent.

Just a few days earlier, many market participants had expected an interest rate cut. However, the escalation in the Middle East abruptly changed investors’ assessments. Rising energy prices and declining risk appetite in international financial markets increased pressure on Turkish monetary policy.

In its statement, the central bank noted that geopolitical developments had created new uncertainties regarding inflation and economic growth.

Tighter Monetary Policy Through the Back Door

In parallel with the decision, the central bank implemented several technical measures to effectively raise funding costs within the banking system.

As early as the beginning of March, regular repo auctions were suspended—an instrument the central bank occasionally uses to steer banks more heavily toward short-term credit facilities. As a result, the average refinancing rate for banks temporarily rose to around 40 percent.

The central bank’s interest rate corridor also remained unchanged. The overnight interest rate remains at 40 percent, while the deposit rate remains at 35.5 percent. In extreme cases, the central bank could also direct banks to the so-called late liquidity window, where the interest rate is even higher.

Billions to Stabilize the Lira

To curb turbulence in the foreign exchange market, the central bank also intervened massively in the market. According to estimates, it sold approximately $22 billion from its reserves between March 2 and 10.

Tweets: The interventions are reflected in the central bank’s account balance with a one-day delay. Data points to strong demand for foreign currency on the first trading day (Monday, March 2) and on the last trading day of the first week of intervention (Friday, March 6).

The interventions followed significant capital outflows: In the days immediately following the start of the geopolitical escalation alone, investors withdrew more than eight billion dollars from Turkish financial assets.

Nevertheless, the local currency remained relatively stable. The dollar appreciated only moderately against the lira and was most recently trading around the 44-lira mark.

Risk premiums on Turkish government bonds also remained relatively stable. Credit default swaps stabilized at around 250 basis points.

Inflation Remains High

At the same time, inflation continues to remain at a high level. According to the statistics office, consumer prices rose by more than 31 percent year-over-year in February.

Rising energy prices are having a particularly strong impact. The rise in fuel prices has recently accelerated significantly.

To limit the burden on consumers, the government reactivated a tax mechanism for fuels. As a result, a large portion of the price increases is initially being cushioned by a reduction in the excise tax.

However, this leeway is limited: if oil prices continue to rise, price increases could soon be passed on to consumers in full.

Monetary policy remains uncertain

The future course of monetary policy depends heavily on the development of energy prices and the geopolitical situation.

The central bank’s next interest rate meeting is scheduled for April 22. If the situation stabilizes, the central bank could resume its path of interest rate cuts. If uncertainty remains high, however, a renewed tightening of monetary policy cannot be ruled out.

Many economists are already anticipating that inflation this year will be significantly higher than previous forecasts.