Turkey Holds Interest Rates at 37% Amid Inflation and Energy Pressures
Turkey's central bank kept its interest rate at 37% for the fifth consecutive time amid persistent energy shocks and annual inflation of 31.51% in August.
Turkey's central bank has left its benchmark interest rate unchanged at 37% for the fifth consecutive time, with the overnight lending rate remaining at 40% and the overnight borrowing rate at 35.5%. The decision was widely anticipated, as 16 out of 17 economists surveyed projected no change.
The central bank last lowered rates in January, moving from 38% to 37%, and has since adopted a wait-and-see approach to determine whether disinflation is taking firm root. In its rate statement, the bank noted that underlying inflation trends are moderating and domestic demand remains subdued, though high energy prices driven by regional developments pose renewed risks.
Inflation Trends and Energy Pressures
Annual inflation in Turkey eased to 31.51% in August, down from 31.75% in July, with consumer prices rising 1.84% on a monthly basis. While representing an improvement over previous years of hyperinflation, price growth remains exceptionally high, directly eroding public purchasing power.
Energy prices surged by 5.46% in August, led by an 11.23% jump in fuel costs, bringing annual energy inflation to 39.23%. This upward pressure materialized even before Brent crude prices retested the $100 per barrel threshold. Turkey is acutely vulnerable to oil and gas fluctuations, importing roughly 71% of its total energy needs.
Economic Slowdown and Monetary Policy
Turkey's GDP expanded by 2.3% year-over-year in the second quarter of 2026, and 1.1% compared to the first quarter. Private consumption grew by 3.5%, investments increased by 0.6%, and exports dropped by 3.4%. High borrowing costs continue to weigh on corporate credit, mortgages, and household loans.
The government recently updated its economic program, pushing back its timeline for single-digit inflation by two years. The official year-end 2026 inflation forecast was revised up to 28.4%, while the central bank adjusted its projection from 26% to 28%. ING economists anticipate that rates could decline to 35% by year-end through two consecutive quarter-point cuts in the final quarter.
Lira Stability and Foreign Capital
The Turkish lira continues to depreciate against the dollar, albeit at a more gradual pace than historical sell-offs. The central bank remains vigilant against rapid currency depreciation, which directly feeds into imported inflation given the country's heavy reliance on foreign energy, machinery, and raw materials.
High interest rates help stabilize the currency by attracting foreign investors seeking strong yields on local bonds and deposits. Carry trade activity has also factored into Turkey's stabilization narrative, though rapid currency depreciation remains an acute tail risk for leveraged investors.
