Erdal Saglam: Central Bank Faces Renewed Pressure to Cut Rates as Political Crisis Weighs on Economy

After the March 19 crisis surrounding Ekrem İmamoğlu’s arrest and subsequent rate cut, the Central Bank of Turkey (CBRT) is struggling to convince markets that economic normalization is on track. Despite repeated official statements emphasizing stability and policy continuity, financial markets remain skeptical. Investors and the real sector are interpreting recent developments — including signals of upcoming rate cuts and fresh credit programs — as signs of creeping monetary easing amid ongoing political uncertainty.

Confidence Falters Despite CBRT Assurances

CBRT officials have made efforts to project stability since the March 19 turmoil, insisting that recent turbulence will not derail policy objectives. However, this message has failed to restore confidence among investors. Market participants say strong signals of credit tightening have not materialized. Instead, the talk of renewed lending and rate flexibility is interpreted as a tactical shift — an implicit acknowledgment that political risks are undermining the economy’s recovery path.

As one analyst put it: “When a country suffering an economic blow can’t stabilize its political outlook, monetary easing becomes inevitable — even if it comes at the cost of a weaker currency.”

Inflation Targets in Doubt, Pressure Builds for Monetary Easing

Finance Minister Mehmet Şimşek recently signaled that the government is unlikely to meet its year-end inflation targets, stating they are still “sincerely committed to disinflation.” Monthly CPI increases exceeded 3% in both March and April, and with inflation potentially hitting 70% by June, the government’s goal of bringing year-end inflation below the current 42% policy rate appears increasingly unrealistic.

This macro backdrop is fueling speculation that the CBRT will have little choice but to deliver another policy rate cut by the June or July Monetary Policy Committee (MPC) meetings.

KGF Loan Expansion Returns to the Forefront

In parallel, the government is preparing a new wave of low-interest, state-guaranteed credit — this time via public banks — aimed at SMEs. Sources indicate that this initiative will not be solely Treasury-backed but will rely on broader public sector coordination.

Market observers are now closely watching whether these credit programs will be synchronized with interest rate cuts, thereby softening monetary conditions further. Some Central Bank officials have privately confirmed that a joint move involving KGF credit expansion and rate easing is under consideration.

In public statements, CBRT remains cautious, saying rate cuts would only follow if credit markets ease and loan growth rebounds. But the political pressure for economic stimulus is mounting — particularly as President Erdoğan renews calls for growth-driven policies and signals dissatisfaction with economic stagnation.

Early Rate Cut Signals Already Emerging

After the March 19 MPC meeting, CBRT’s overnight funding rate — previously stable around 49% — began to fall. By late May, overnight repo transactions dropped below 48%, prompting expectations of a broader liquidity-driven policy shift. The TLREF benchmark rate also declined, reinforcing speculation that a June rate cut is on the table.

Economists say this liquidity easing is already impacting market behavior, emboldening banks and firms to expand lending and investment activities.

Demand Still Resilient: Is Disinflation Real?

Despite CBRT and Şimşek’s assertions that Turkey is entering a disinflationary phase, real sector data paints a different picture. Industrial production remains strong, and domestic demand has yet to show signs of meaningful softening. Analysts argue that if the aim is to tame inflation by curbing demand, monetary tightness must persist for several more months.

However, the government appears to be pivoting toward a more accommodative stance, particularly as business lobbies complain of missed investment opportunities and a tight credit environment. The return of KGF loans is seen as an admission that the current policy mix has failed to deliver both inflation control and growth.

Erdoğan’s Growth Imperative

President Erdoğan has made it clear that economic stagnation is not acceptable ahead of potential snap elections. His insistence on faster growth, especially through public lending and fiscal incentives, is pressuring monetary authorities to fall in line. Erdoğan’s remarks suggest a belief that rate cuts and cheap credit must now drive a fresh wave of demand — regardless of inflation risks.

This political push has put CBRT in a bind. Attempting to balance inflation control and growth amid a politically charged environment is becoming increasingly difficult.

The Bigger Threat: FX Instability

While the March 19 rate cut was framed as a response to easing inflation expectations, its real motivation may have been political. İmamoğlu’s arrest, court rulings, and subsequent public backlash triggered a surge in capital flight, with nearly $50 billion in outflows reported over just a few days.

This exodus reignited demand for foreign exchange and forced the Central Bank to intervene more heavily. At the same time, investors began pricing in the risk of new elections, which could trigger a deeper political and currency crisis.

Rather than cooling markets, the March rate cut raised red flags. Many foreign investors now view the decision as a signal that Turkey is once again abandoning monetary discipline in favor of political expediency. As a result, the Turkish lira remains under pressure, and the risk of a broader FX shock remains elevated.

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