Türkiye's central bank is likely to pursue a gradual normalization of monetary policy in the remainder of the year by lowering its effective funding costs before considering further policy rate cuts, according to economists.

Their estimates came after the Central Bank of the Republic of Türkiye (CBRT) kept its benchmark one-week repo rate at 37% on Thursday, as expected, leaving borrowing costs unchanged for a fourth consecutive meeting.

Policymakers thus maintained a cautious stance amid heightened geopolitical uncertainty and lingering inflation risks as oil prices rise again after the U.S.-Iran conflict flared up.

CBRT's interest rate corridor was also left unchanged, with the upper and lower bounds remaining at 40% and 35.5%, respectively, in line with expectations.

As a result, the bank will continue to fund through the upper bound of the corridor, as the repo window has remained closed since the start of the Middle East conflict.

In its statement, the bank said underlying inflation eased modestly in June, but leading indicators suggested it would temporarily pick up in July.

It also warned that rising energy prices amid heightened geopolitical uncertainty posed upside risks to inflation, while noting that recent data pointed to a more pronounced weakening in domestic demand.

Limited room

Economist Haluk Bürümcekçi said the CBRT had only limited room for policy rate cuts during the remainder of the year, even under a more favorable macroeconomic scenario.

He said the bank would likely first unwind its temporary monetary tightening by shifting funding back toward one-week repo auctions before lowering the benchmark policy rate, provided global conditions improve.

Before the recent escalation of the Iran war, the prevailing expectation was that the CBRT would begin easing through its liquidity tools, allowing the effective cost of funding to fall from 40% to 37%, either gradually or through full normalization.

Since the conflict started, the bank has halted an easing cycle that began in late 2024 and taken other liquidity steps.

Annual inflation eased to 32.1% last month from 32.6% in May. The decline had stalled following a sharp rise in energy prices caused by the war. On a monthly basis, consumer prices rose 0.99% in June, slowing from 1.7% in May.

'Wait-and-see mode'

Analysts at the Dutch financial giant ING said they expect the central bank to remain in "wait-and-see mode" in the near term before deciding whether to lower the effective cost of funding toward the policy rate.

A renewed agreement in the U.S.-Iran conflict could create scope for the bank to normalize the effective funding rate as early as August or September, depending on developments in inflation and reserve dynamics, they added.

Bürümcekçi noted that the CBRT maintained the 450-basis-point spread between its overnight borrowing and lending rates and signaled continued caution by highlighting expectations of a temporary rise in underlying inflation in July and ongoing increases in energy prices.

Depending on uncertainty in global markets and the trend in foreign exchange demand, he said the current outlook is expected to be maintained for some time, with the CBRT providing funding through the overnight lending channel rather than holding weekly repo auctions.

He added that the bank's statement suggested policymakers would continue their cautious stance on macroprudential measures and liquidity management.

Kutay Gözgör, research director at Kuveyt Türk Investment, said the statement retained a cautiously hawkish tone, with no explicit guidance on restarting one-week repo auctions.

Compared with the previous policy statement, the bank placed greater emphasis on a temporary increase in underlying inflation and renewed upward pressure from energy prices, indicating a more cautious assessment of near-term inflation risks, he said.

At the same time, Gözgör said the bank struck a somewhat more dovish tone on economic activity by stating that weakness in domestic demand had become more pronounced, suggesting tighter monetary conditions were having a stronger effect on spending.

Return to repo auctions

He said the combination of slowing domestic demand and persistent inflation risks suggested policymakers still saw limited room for near-term easing.

Gözgör expects the CBRT to begin its normalization process by reintroducing one-week repo auctions, potentially as early as August if inflation continues to improve.

"Although the lack of clear guidance regarding a return to repo auctions or the interest rate cut process may limit strong dovish pricing in the short term, we believe the possibility of a gradual normalization remains intact, contingent on an improvement in the inflation outlook," he noted.

That would gradually reduce the average funding cost before measured policy rate cuts later in the year. He forecasts the bank will lower the policy rate to 34% by the end of 2026, assuming inflation continues to moderate.

The CBRT raised its end-2026 inflation forecast to 24% from 16% in its quarterly inflation report published in mid-May, saying the short-term inflationary effects of the Iran war would remain "pronounced."

The bank projects inflation falling to 15% at the end of 2027 and 9% at the end of 2028.