The Turkish central bank kept its key policy rate unchanged at 37% on Thursday, holding steady for a third straight meeting as it monitors the inflation impact of the Iran war.
The Central Bank of the Republic of Türkiye (CBRT) also cited that the underlying trend of inflation "decreased slightly in May," while also suggesting that the first quarter data points "to a slowdown in economic activity and leading indicators suggest a continued weak course in domestic demand."
"The underlying trend of inflation, which increased in April due in part to higher energy prices, following its rise in the first months of the year, decreased slightly in May," the bank said following its closely watched Monetary Policy Committee (MPC) meeting.
However, the bank warned that energy prices "remain volatile and elevated," amid geopolitical developments and the resulting uncertainties.
Oil and gas prices have surged significantly since the start of the Iran conflict, with Brent crude briefly hitting peaks of nearly $120 a barrel. Following easing in recent weeks, the prices have spiked again in recent days amid the renewed risk of attacks between the U.S. and Iran.
Analysts were widely expecting the bank to keep the cautious approach and leave rates on hold this week. A smaller number of economists were forecasting a hike. In a Reuters poll, 12 of the 14 economists surveyed predicted no change to borrowing costs, while two forecast a rate hike.
The committee has also kept the central bank's overnight lending rate and the overnight borrowing rate at 40% and 35.5%, respectively. The bank uses the rate corridor to adjust the cost of funding to the market when necessary without changing the benchmark rate.
Annual inflation in Türkiye edged up to 32.6% in May from 32.4% in April, official data showed last week.
Since the war started at the end of February, the CBRT has halted an easing cycle that began in late 2024 and taken other liquidity steps that pushed the lira overnight rate up to the 40% limit.
The war-related surge in energy prices has weighed on import-heavy economies like Türkiye, although authorities have introduced measures to cushion its impact on consumers, mainly through a so-called "sliding scale" system that limited fuel prices.
In its quarterly inflation report in May, the central bank raised its end-2026 interim inflation target to 24% from 16%, forecasting that the short-term inflationary effects of the Iran war would remain "pronounced."
"The impact of geopolitical developments on the inflation outlook through the cost channel, economic activity and expectations is closely monitored," the bank also said.
"The tight monetary policy stance, which will be maintained until price stability is achieved, will strengthen the disinflation process through demand, exchange rate, and expectation channels," it added.
It also reiterated that the committee "will determine the policy rate by taking into account realized and expected inflation and its underlying trend in a way to ensure the tightness required by the projected disinflation path in line with the interim targets."
The bank also underscored its meeting-to-meeting approach and "focus on inflation outlook."
The Turkish lira held steady at 46.1550 against the dollar after the announcement, while the main Istanbul share index was slightly higher.
