Turkiye - CBRT indecision could prove costly
As expected the CBRT’s MPC kept policy rates unchanged at 37%. But given geopolitical trends I think that was a mistake.
https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en/main+menu/announcements/press+releases/2026/ano2026-12
Actually prior inflation trends - with inflation doggedly holding above 30% - suggested that the prudent move should have been at the least a hold. But then add on the extreme geopolitical risks now emanating from the war in Iran and this should have encouraged a further policy tightening - a rate hike - in my view.
It’s a cop out to say that there are uncertain risks coming out of the Gulf so let’s wait and see. This is the biggest crisis in the Gulf since the 70s. Oil prices are already higher by at least $30 than at the outset of this crisis. And the consensus is that Turkiye is amongst the most vulnerable EM countries to higher energy prices as it’s still a huge energy importer. A rough rule of thumb is each 10 buck increase in the oil price adds $3bn to the current account deficit and 1.2% to inflation. So at $100 oil that’s already a 3.6% hit to inflation and at least $9bn to the current account deficit. And the current account deficit was already expected to reach $30 billion this year so now more likely this will be $40 billion best case. And this does not take account of all the other supply chain disruptions coming from the Gulf which will likely hike prices across a range on inputs imported by Turkiye from fertilizer to helium. But even then it’s very likely that the current oil price will not be the peak. This crisis looks still set on an escalation path - the Islamic Republic appears to have found Trump’s TACO choke point and are likely to extend the war until they gat assurances of no more future attacks, sanctions relief and economic assistance. They will play hard ball, attacking the Strsits and the Gulf until then. Indeed, I think it is more likely we see oil hit $150 a barrel from here, not $70. Imagine that - a further $15 billion hit then to the current account deficit taking it to $50 billion plus, and 7% plus more to inflation. You could probably then argue that at $150 oil we are in global systemic crisis mode and most central banks in EM will be hiking rates. But I think the prudent thing for any central banks to do is plan for the worst case not take a let’s just wait and see approach.
And for Turkiye it is not just about inflation but broader macro-financial stability and the real exchange rate anchor for inflation. Already the CBRT has had to use a weight of FX reserves defending the lira against the shock from the war in Iran - perhaps as much as $20 billion. Now while FX reserves are close to record highs, they are not finite and a pre-emptive policy rate hike would have sent a strong positive signal to the market and likely stemming selling pressure on the lira and FX reserve loss.
And in the circumstances I think no one would have blamed the CBRT for hiking policy rates in response to geopolitical risk. And if they (and me) ended up being wrong on geopolitical risk in Iran and oil prices don’t stay elevated for long they will have got ahead of the curve in the important longer term fight against inflation. Indeed, no one blamed the CBRT for their emergency policy rates hike last March in response to the surprise arrest of Istanbul mayor Imamoglu. Indeed, the CBRT actions then helped stabilise the political economy. I think a hike this time around would have also sent a strong message of reassurance in deeply worrying times. An opportunity was missed in my mind.
I do not believe that the Central Bank is independent or run with orthodox logic. But the country has faced repeated episodes where aggressive tightening led to short-term lira support but also deep recessions, credit contraction, and higher unemployment. A pre-emptive rate hike in an environment of high real rates could have further depressed domestic consumption and investment, worsening the macro outlook rather than stabilizing it. Regarding oil and geopolitical risks: yes, oil is higher, but the CBRT’s focus is on domestic demand and core inflation, not headline shocks they may consider temporary. Will it be temporary? I don’t know. But the CBRT has often treated energy-driven inflation as a pass-through shock, which may reverse once the market stabilizes. Acting aggressively now could over-tighten policy in response to a potentially volatile but short-lived spike, harming growth unnecessarily. And some of the energy price increases may already be partially hedged or mitigated through domestic energy measures. Using a fixed multiplier for increases in oil ignores elasticities, substitution effects, and government interventions. Predicting $150 oil may be plausible, but central banks rarely act on extreme tail scenarios unless there is high probability, otherwise, they risk policy credibility damage if the scenario does not materialize. Also, a rate hike may have a modest immediate effect on the lira, but it could increase debt-servicing costs, hurt growth, and raise fiscal risks, potentially offsetting any short-term stabilization benefits. In short, the CBRT likely judged that the risks of over-tightening outweigh the benefits, especially given our fragile growth and credit conditions. Geopolitics matters, but central bank might be cautious because policy can’t reliably preempt tail events without risking domestic macro instability.