ANALYSIS: When Will the CBRT Cut Rates? Global Energy Shock Clouds Outlook

The Central Bank of the Republic of Türkiye (CBRT) is likely to keep interest rates on hold longer than expected as a major global energy shock fuels inflation risks and uncertainty. While domestic demand shows signs of cooling, elevated energy prices and geopolitical tensions may delay any easing cycle well into the future.

A Historic Global Supply Shock

The global economy appears to be facing one of the largest supply shocks since the 1970s—or even since World War II. The duration of this shock remains highly uncertain.

The surge in energy prices has triggered a powerful wave of inflation worldwide, first pushing headline inflation higher and now feeding into core inflation. The key uncertainty for central banks is the extent to which energy-driven inflation will create “second-round effects” by altering inflation expectations.

Some economists argue that inflation will prove temporary and eventually return to pre-war trends, while others warn that expectations could become permanently unanchored.

Central Banks Face a Difficult Trade-Off

In this environment, central banks face a complex policy dilemma.

Even if inflation rises sharply, raising interest rates may have limited effectiveness if inflation expectations are not anchored. At the same time, higher energy prices are already eroding disposable income and corporate profits, which will weaken demand and tighten financial conditions.

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CBRT Holds Steady Amid Uncertainty

Against this backdrop, the Central Bank of the Republic of Türkiye’s decision to keep its policy rate unchanged reflects a cautious approach.

The central bank is expected to maintain its current funding stance—effectively around 40%—until geopolitical uncertainties ease, particularly those related to the Iran conflict and disruptions in the Strait of Hormuz.

In its latest policy statement, the CBRT noted that inflation’s underlying trend eased in March but could rise again in April. It also highlighted heightened volatility in energy prices and emphasized the importance of monitoring second-round effects on inflation and economic activity.

Two Key Signals from the CBRT

The CBRT’s statement offers two critical insights:

• First, domestic demand appears to be slowing, which could support earlier rate cuts if the trend persists.
• Second, the risk of second-round inflation effects remains significant. If these effects intensify, further monetary tightening—not easing—could come back onto the agenda.

Energy Prices Likely to Stay Elevated

The outlook for energy prices suggests limited room for monetary easing.

Even if direct military confrontation subsides, disruptions in energy infrastructure and supply chains are expected to keep prices elevated. Damage to production and transportation facilities in the Gulf region could take years to repair.

Meanwhile, Russia’s energy exports remain constrained by ongoing conflict, and U.S. shale producers are unlikely to ramp up output quickly due to high production costs and uncertainty about the longevity of the current price shock.

As a result, Brent crude prices are unlikely to fall below $100 per barrel before 2027, according to this view.

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Implications for Monetary Policy

Under such conditions, the CBRT may be unable to cut interest rates in the foreseeable future. Policy rates could remain around current levels throughout the year.

While some market participants expect political pressure to push for rate cuts, there are signs that the government remains committed to a tight monetary stance.

Finance Minister Mehmet Şimşek has recently pushed back against criticism of the economic program, signaling continued focus on inflation control.

Domestic Demand and Political Risks

Energy prices are not the only variable shaping policy decisions.

A sharp slowdown in domestic demand—potentially triggered by political uncertainty or a confidence shock—could open the door for limited rate cuts. However, recent data from consumer confidence surveys suggest that households are still inclined to spend.

Similarly, business sentiment indicators show some weakening but do not yet point to a severe contraction in economic activity.

Credit Risks and Forward Guidance

In this uncertain environment, households and businesses are advised to plan for a scenario where borrowing costs remain high—or even rise further.

The assumption that interest rates will fall may prove overly optimistic, and refinancing conditions could become more challenging when existing loans mature.

By Atilla Yesilada