ANALYSIS: CBRT Cannot Cut Rates, Economy Program Must Be Defended

Türkiye’s central bank is expected to hold rates steady this week as geopolitical risks rise, but abandoning the Economic Stability Program (EIP) or cutting rates prematurely could trigger inflation, currency instability, and a broader financial crisis, according to analyst commentary.

CBRT expected to stay on hold amid geopolitical uncertainty

The Central Bank of the Republic of Türkiye (CBRT) is widely expected to keep interest rates unchanged at its upcoming Monetary Policy Committee (MPC) meeting, brought forward due to the April 23 public holiday.

Rising uncertainty linked to the Iran war and elevated energy prices has reinforced the case for caution. Analysts say monitoring external developments rather than reacting prematurely remains the most prudent course.

However, calls to abandon the current economic program and redesign policy are gaining traction in some circles, despite mounting risks.

EIP seen as anchor for stability

The current economic framework, often referred to as the Economic Stability Program (EIP), aims to restore macroeconomic balance through lower inflation, a manageable current account deficit, and sustainable growth.

Some commentators argue that the global supply shock triggered by the war has already undermined inflation targets, suggesting policymakers should instead focus on avoiding recession and supporting struggling businesses.

Yet critics warn that such a shift would come at a high cost.

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Rate cuts risk triggering inflation and currency pressure

According to the analysis, cutting interest rates under current conditions would quickly push real rates back into negative territory, encouraging borrowing and boosting domestic demand.

This could create a dual inflation dynamic, where demand-driven pressures compound existing supply-side shocks.

At the same time, confidence in the Turkish lira could weaken. Investors and households may shift toward foreign currency, putting renewed pressure on the CBRT’s reserves.

Such a scenario risks reversing recent stabilization efforts and reigniting dollarization trends.

Fiscal risks and potential capital controls

A broader departure from the EIP, including credit expansion and wage hikes, could accelerate inflation toward 40% or higher, while perceived inflation could climb even further.

Expanding budget deficits may lead to rising borrowing costs or potential credit rating downgrades. In extreme cases, the central bank could be forced to provide indirect financing to the government.

The most severe risk, however, lies in renewed pressure on foreign exchange reserves, potentially forcing policymakers to consider informal capital controls to limit currency outflows.

Energy shock expected to persist

Expectations that energy prices will quickly normalize are seen as overly optimistic.

International Energy Agency head Fatih Birol has warned that damage to production and transport infrastructure in the Gulf could keep oil and gas prices elevated for up to two years.

Even in the event of a ceasefire or reopening of the Strait of Hormuz, supply disruptions are expected to linger.

Growth challenges and policy trade-offs

Under such conditions, analysts say Türkiye is unlikely to generate strong growth regardless of policy choices. Corporate bankruptcies and rising unemployment may be unavoidable.

Instead of broad stimulus, targeted fiscal support for vulnerable households is seen as a more sustainable approach, provided it does not widen the budget deficit.

Allowing inefficient firms to exit the market is also viewed as part of necessary economic adjustment.

Inflation remains the key risk

The analysis warns that once inflation reaches levels around 40%, it becomes significantly harder to bring down, potentially requiring years of tight policy.

High inflation is also linked to broader social consequences, including rising inequality and social instability.

Conclusion: Tight policy seen as necessary despite costs

With geopolitical risks elevated and inflation pressures persistent, maintaining tight monetary and fiscal policy is seen as essential to preserving macroeconomic stability.

The analysis concludes that, under current conditions, even further rate hikes could be justified to anchor expectations and prevent a deeper crisis.

By Atilla Yesilada, translated from Turkish original by ChatGPT