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Turkey’s central bank maintained its One-Week Repo Rate at 46% and kept the top band of its rate corridor at 49%, which differed from some expectations. The Overnight Borrowing Rate remained at 44.50% as predicted, indicating a cautious approach to interest rate policy.
The central bank anticipates further declines in inflation but expects slower economic growth. It has reiterated that the restrictive monetary policy will continue until price stability is achieved through a consistent reduction in inflation.
Policy Rate Review
The bank emphasised reviewing the policy rate at each meeting individually, prioritising inflation forecasts. After the rate decision, the Turkish Lira weakened, with the USD/TRY reaching around 39.5500.
Inflation reflects the price increase of a standard basket of goods, measured monthly and annually, with core inflation excluding food and fuel due to volatility. Central banks target core inflation, typically aiming for around 2%.
The Consumer Price Index (CPI) tracks price changes over time, with central banks focusing on core CPI. High inflation often leads to elevated interest rates, strengthening the currency, while lower inflation results in opposite effects.
Historically, Gold was sought during high inflation periods due to its value retention. However, higher interest rates, prevalent during inflation, make Gold less attractive as they increase costs relative to interest-bearing assets. Conversely, lower inflation can favour Gold as it typically reduces interest rates.
While the policy rate was held unchanged in the latest decision—remaining firmly at 46%—the upper boundary of the interest corridor was also left untouched at 49%. This comes despite some forecasting a modest softening at the top end. The Overnight Borrowing Rate, sitting at 44.50%, met expectations precisely, pointing towards a deliberate and unflinching stance from the central bank. In short, they continue to lean hard on a restrictive policy stance, even as growth prospects taper off slightly.
Inflation and Economic Impact
In plain terms, what we’ve seen is a reiteration: they’re not loosening yet—not until inflation, as measured both broadly and through core components, shows a lasting and observable drop. They’re not chasing GDP growth; they’re chasing steady disinflation, not in the headlines, but in the deeper, more persistent categories.
Following this decision, the Lira did what it often does during tightening pauses—it slipped. The USD/TRY pair reached above 39.50, reflecting a shift towards the dollar as investors reassessed forward real returns. Some were likely hoping for a more hawkish tone to maintain recent currency gains. That didn’t quite happen.
The broader backdrop here remains intensifying domestic price pressures. Inflation is tracked monthly via the Consumer Price Index—a basket of goods reflecting average household consumption. The core figure, once food and fuel are excluded, is usually the metric of choice for policy guides since it smooths out the noise from seasonal and external dislocations.
As we see the trade-offs at play, it’s obvious that policy is being wielded carefully. High interest rates are often a brake on economic activity, but they also tend to support the domestic currency and suppress imported inflation. Gold—long considered a hedge—remains less appealing in such conditions, as holding a zero-yield asset becomes increasingly costly when rates rise.
What stands out currently is that, while a less aggressive voice was heard from policymakers, there’s no indication yet that a cutting cycle is near. The caution suggests that the inflation path ahead might still throw up surprises. For us, forwarding positions need to remain aligned with that shifting yield differential and deteriorating domestic liquidity conditions.
Pair moves, especially in cross-currency basis terms, will need close observation over the coming weeks. One shouldn’t assume that holding rates flat will be enough to anchor the Lira or keep the bond market from pricing sooner-than-expected easing steps if inflation data softens. We’ve got data points approaching that will test this narrative fast.
Meanwhile, positioning around non-interest-bearing assets might deserve a reassessment. If interest rates remain high but plateau, and if real yields inch downward due to sticky inflation, certain defensive plays could re-emerge. Equally, any signs of slowing disinflation could trigger another round of volatility, particularly in the front-end rates space.
Ultimately, this is a momentum play, hinging on whether expectations about slower inflation materialise. And in periods of policy reassessment, derivative traders typically need to act tactically—not on sentiment, but rooted in the sequencing of inflation projections and central bank communication clarity. The gap between expectations and delivery is often where trades are made or lost.
