Once again, Turkey’s central bank sensed an opportunity to lower interest rates was materialising, and once again the unending Iran War upended its hopes. Wall St investment banks are again parroting that rising oil prices will force Ankara to hold its effective borrowing rates higher for longer.

The new flare-up in the conflict pushed Brent crude prices to over $100 per barrel by the end of the week. Though the weekend brought a two-day lull in hostilities, the expectations that the Turkish national lender could soon align its actual operational funding rate with its nominal policy benchmark had already dissolved.

While the authority held its headline one-week repo rate steady at 37% at its July 23 meeting, its effective overnight window rate has remained at 40% since March 1, the day after the conflict was ignited with US and Israeli attacks on Iran.

During the April 8-July 7 ceasefire, the central bank again bought up dollars to build up its reserves, meaning it provided lira to the system. As a result, net funding points to excess liquidity with tight liquidity conditions maintained via Turkish lira deposit auctions to absorb the excess lira.

Any move in August?

The international investment banks now unanimously agree that plans to revive the one-week repo auctions, which would effectively amount to a stealth rate cut back to 37%, have been kicked down the road.

Bank of America Global Research noted following the July 23 rates meeting that the earliest window to signal operational normalisation will likely come with the August 13 inflation report release. However, any move remains contingent on an easing of the regional friction and lower oil prices.

Risks to domestic fuel and transport prices will constrain room for effective easing, wrote BofA analyst Hande Kucuk in a note to clients, adding that a return to $100 Brent oil reinforces a baseline scenario where the effective funding rate stays near 40% for an extended period.

BofA revised its year-end inflation projections upward to 30-31% in line with Brent averaging $94 in the second half of the year, keeping the main policy rate stuck at 37%.

Something in September?

Deutsche Bank economist Yigit Onay, meanwhile, estimated that the recent 35% surge in global crude prices alongside a 50% jump in European natural gas prices added roughly 1.5 percentage points to Turkey’s domestic inflation.

In response, Deutsche Bank raised its year-end Turkish inflation forecast from 28.5% to 30%, pushing back its expectations for direct interest rate cuts to the fourth quarter of the year.

Onay now expects that the revival of the one-week repo auctions will have to wait till the next rate-setting meeting, scheduled for September 10. Rate cuts will be on the cards in 4Q, while delaying any monetary easing to 2027 is also a realistic scenario.

At JPMorgan, the forecast for 100-basis point rate cuts in both September and October has been shoved up to October and December. The bank anticipates that the central bank will first resume weekly repo auctions in September.