Turkey’s central bank faces triple pressure as Iran war derails policy outlook
fatih karahan2
The Iran war has upended Türkiye’s economic outlook, placing the central bank under mounting pressure from rising energy prices, capital outflows, and falling gold prices. These developments are eroding foreign reserves and complicating monetary policy decisions, with analysts warning that interest rate hikes may return to the agenda if current conditions persist.
War disrupts economic strategy
The US-Israel war with Iran has significantly altered Türkiye’s macroeconomic trajectory.
The Central Bank of the Republic of Türkiye (CBRT), which had expected:
- Lower inflation and interest rates
- Increased foreign inflows
- Rising gold prices supporting reserves
is now facing a sharply deteriorating environment.
Energy shock hits current account and inflation
A surge in energy prices has become a key risk factor.
- CBRT had forecast oil prices at $60.9 per barrel for 2026
- Current levels are around $113 per barrel
- Natural gas prices have risen by 85% during the conflict
As a major energy importer, Türkiye is expected to face:
- A widening current account deficit
- Renewed inflationary pressures
Turkish assets hit by Iran war fallout as foreign investors exit
Foreign outflows accelerate
Capital outflows have intensified following the escalation of the war.
- $12.7 billion exited via swaps in the first two weeks of March
- An additional $5.8 billion outflow occurred in equities and bonds
These outflows are placing direct pressure on reserves and financial stability.
Gold reversal weakens reserves
Gold, which had been a key driver of reserve accumulation in recent years, is now adding to the pressure.
- Gold prices fell from a peak of $5,595 to around $4,099
- A decline of over 36% in roughly two months
The drop reflects:
- A stronger US dollar
- Rising expectations of global interest rate hikes
This reversal is negatively affecting CBRT’s reserve position.
Reserves decline sharply
CBRT reserves have already come under significant strain.
- Gross reserves fell by $20.7 billion in early March
- Ongoing FX interventions and gold price declines are expected to deepen losses
This limits the central bank’s ability to stabilize markets.
Interest rate outlook becomes uncertain
The CBRT kept its policy rate unchanged at 37% in March, while effectively tightening liquidity conditions to around 40% funding cost.
For the upcoming April 22 Monetary Policy Committee meeting:
- Markets largely expect rates to remain unchanged
- However, some global institutions see rising odds of a hike
Analysts warn that persistent inflation and reserve pressure could force the central bank into a more hawkish stance.
COMMENTARY: Iran War Escalates Into Global Shock as Türkiye Faces Economic and Strategic Risks
Global banks flag rate hike risk
International institutions are increasingly highlighting tightening risks:
- Citigroup expects the CBRT to adopt a more cautious policy stance
- Goldman Sachs sees the possibility of rates rising to 40% or higher
A potential 300 basis point rate hike is being discussed if:
- Inflation accelerates further
- Reserve losses continue
Inflation risks building
Market expectations for March inflation are already rising, with forecasts around 3% monthly CPI.
Additional risks include:
- Possible hikes in natural gas and electricity prices
- Continued pressure from energy costs
These factors could further complicate the inflation outlook.
Trump’s pause offers temporary relief
US President Donald Trump’s decision to postpone strikes on Iran’s energy infrastructure for five days has provided temporary relief to markets.
Following the announcement:
- Oil prices declined sharply
- Gold and equities rebounded
A de-escalation in the conflict could ease pressure on Türkiye’s economy and reserves.
Turkish press reports, PA Turkey news desk
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