The monetary policy committee (MPC) of Turkey’s central bank on June 19 left its main policy rate (one-week repo) and overnight lending rate unchanged at 46% and 49%, respectively.

The authority was expected to cut its overnight rate by 150bp to fix the symmetry of its so-called interest rate corridor given that its overnight borrowing rate stands at 44.5%.

The Turkish central bank occasionally scraps or limits one-week repo auctions to push local lenders to the overnight window for the sake of additional tightening within the interest rate corridor.

Funding at 46%

Since June 13, the authority’s weighted average cost of funding has fallen to 46%. It remained at 49% between May 26 and June 5. In parallel, market rates (TLREF) also fell into the 46%s.

Developments strengthened expectations for a cut in the overnight rate. However, the national lender is clearly remaining cautious as it takes into account possible impacts from the ongoing war between Israel and Iran. With no clear outcome of the conflict yet visible, core economic policy making is engulfed in a fog of uncertainty.

“Geopolitical developments”

Turkey's underlying trend of inflation declined in May and leading indicators suggest the downward trend has continued in June, the MPC said on June 19 in a statement.

Potential effects of geopolitical developments (particularly the Iran-Israel war and the associated course of oil prices) plus the factor of rising protectionism seen in global trade when it comes to the country's disinflation process are closely monitored, the central bank noted.

35% y/y in May

On June 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 35.41% y/y in May versus 37.86% y/y in April and 44% y/y at end-2024.

Below 30% at end-2025

On May 22, the central bank left its end-2025 official inflation "target" unchanged at 24% y/y in its latest quarterly inflation report.

The upper boundary of the forecast range was also kept unchanged at 29%.

The authority expected seasonally-adjusted monthly inflation figures to edge up a little in 1Q25 (due to wage hikes and new year price and fee updates) in comparison to the 2%s in 4Q24.

The expectation is, meanwhile, that the figures will fall below the 1.5%-level starting from 3Q25.

Central bank governor Fatih Karahan reiterated on May 22 that the seasonally-adjusted monthly figure will end the year at a little bit above the 1%-level.

On August 14, the central bank will release its next inflation report and updated forecasts.

Next MPC rates meeting on July 24

On July 24, the MPC will hold its next rate-setting meeting.

Quite obviously, its decisions will depend on how the war between Israel and Iran has developed by that time.

The USD/(Turkis lira) TRY pair has been under renewed pressure since Israel launched its offensive against Iran on June 13. The conversion rate remains in the 39s, but reserves have been burnt through to achieve that stability.

Meanwhile, Turkey’s president, Recep Tayyip Erdogan, has announced consecutive expansions in the credit guarantee fund (KGF) and in central bank loans (YTAK).

These “selective” loans are channelled to businessman who are linked to, and back, the regime. They ease the pressure on the central bank for rate cuts.