By Ed Frankl
Turkey's central bank held borrowing costs on Thursday and flagged that it could tighten interest rates should inflation rise further as war in the Middle East drives up energy prices.
The Central Bank of Turkey held its benchmark one-week repo rate at 37.0%. Investors put slightly more chance of a hike than a hold, according to LSEG data ahead of the decision. In January, the bank cut its key rate for a fifth meeting in a row to 37.0% from 38.0%.
The central bank said despite a relatively flat underlying trend in inflation in February, the impact of the war on energy prices could prompt interest rates to rise for the first time since April last year.
"In case of a significant and persistent deterioration in the inflation outlook, which can also be driven by the recent developments, monetary policy stance will be tightened," the bank said in its statement accompanying the decision.
Further tightening will be needed should the conflict prolong and energy prices remain elevated for a long period, Capital Economics chief emerging markets economist William Jackson said in a note to clients.
"Even if the conflict is short-lived, the [bank] will struggle to bring interest rates down as quickly as it had previously planned, given that growth looks increasingly unbalanced and the inflation backdrop was deteriorating even before the conflict," he added.
Annual Turkish inflation was 31.5% in February, a slight pickup from a more-than-four-year low in the first month of 2026. However, the cooling trend of inflation has prompted the central bank to pursue gradual rate cuts since July last year.
"Geopolitical turmoil provides a temporary respite for the central bank to skip a rate cut it should not have been considering in the first place," Commerzbank economist Tatha Ghose said in a note ahead of the rate decision.
The crisis in the Middle East prompted the central bank to suspend weekly repo auctions and launch a new lira-settled foreign exchange forwards facility to stem the fall in the lira, which pushes up imported inflation.
"To contain the risks posed by these factors to the inflation outlook, decisions supporting tight monetary policy have been enacted alongside coordinated fiscal measures," the bank said.
The Turkish lira nevertheless remained close to a record low against the U.S. dollar after the rate decision.
The bank maintained that its monetary-policy is "tight," and that the stance will be maintained until price stability is achieved.
Governor Fatih Karahan said in February that its interim targets for inflation are 16% and 9% for 2026 and 2027, respectively, though it forecasts inflation to be between 15% and 21% by the end of 2026.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
03-12-26 0837ET
