Turkey’s central bank has kept its One-Week Repo Rate steady at 46% and maintained the upper limit of its rate corridor at 49%, contrary to some expectations. The Overnight Borrowing Rate is unchanged at 44.50%, showing a careful approach to interest rates. The central bank expects inflation to decrease further, but it anticipates slower economic growth. It has confirmed that strict monetary policy will stay until inflation is consistently reduced and price stability is achieved.

Policy Rate Review

The bank emphasized that it will evaluate the policy rate at each meeting, focusing on inflation forecasts. After this decision, the Turkish Lira weakened, with the USD/TRY reaching about 39.5500. Inflation measures the price change of a standard basket of goods, assessed monthly and annually, while core inflation excludes food and fuel due to their volatility. Central banks usually aim for core inflation to be around 2%. The Consumer Price Index (CPI) measures price changes over time, with central banks paying close attention to core CPI. High inflation often leads to higher interest rates, which strengthens the currency, while lower inflation has the opposite effect. Traditionally, Gold is sought during periods of high inflation for its value retention. However, higher interest rates, common in inflationary times, make Gold less attractive since it incurs higher costs compared to interest-earning assets. Conversely, lower inflation can benefit Gold as it typically leads to lower interest rates. While the policy rate remains at 46%, the upper boundary of the interest corridor is still at 49%. This is despite expectations for a minor softening at the top end. The Overnight Borrowing Rate, at 44.50%, aligns perfectly with predictions, suggesting a steady stance from the central bank. In short, they continue to maintain a strict policy, even as growth expectations slightly decline.

Inflation and Economic Impact

In simple terms, the message is clear: they are not easing yet—not until inflation, including core metrics, shows a lasting reduction. They are prioritizing steady disinflation rather than chasing GDP growth. Following this decision, the Lira weakened, with the USD/TRY surpassing 39.50. This shift reflects investor reevaluation of future real returns. Some anticipated a more aggressive tone to help stabilize recent currency gains, but that did not occur. The current situation is characterized by increasing domestic price pressures. Inflation is monitored monthly through the Consumer Price Index, which reflects average household spending. The core CPI, excluding food and fuel, is typically the preferred gauge for policy guidance because it reduces volatility from seasonal and external factors. The trade-offs are clear: high interest rates can slow economic activity, but they also support the domestic currency and reduce imported inflation. Gold, perceived as a safe asset, is less appealing when interest rates rise, as holding a no-yield asset becomes more expensive. Currently, although policymakers have adopted a less aggressive stance, there are no signs that rate cuts are imminent. This cautious approach indicates that inflation might still surprise us. Therefore, investment strategies should align with changing yields and domestic liquidity conditions. Pay close attention to currency pair movements in the coming weeks. Holding rates steady may not be enough to stabilize the Lira or prevent the bond market from anticipating earlier-than-expected easing if inflation data weakens. Upcoming data will quickly test this narrative. Meanwhile, it might be time to rethink positions on non-interest-bearing assets. If interest rates hold steady but real yields decrease due to persistent inflation, some defensive strategies might become relevant again. Additionally, any signs of stalled disinflation could cause more volatility, especially in short-term rates. Ultimately, this is about momentum and depends on whether expectations for declining inflation become reality. In times of policy reassessment, traders should act based on careful analysis of inflation trends and clear communication from the central bank, rather than on sentiment. The gap between what is expected and what is delivered is often where trading opportunities arise. Create your live VT Markets account and start trading now.

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