TCMB Holds Interest Rate at 37 Percent as Inflation Forecasts Diverge

Central Bank Policy and Inflationary Pressures in Turkey

In Turkey, the economic outlook for the remainder of 2026 remains tethered to the volatility of the ongoing conflict. During the most recent meeting of the Monetary Policy Committee (MPC) on July 23, the Central Bank of the Republic of Turkey (CBRT) maintained its policy rate at %37. Despite persistent complaints from the private sector regarding the difficulty of sustaining de-inflationary policies, the central bank has prioritized price stability. Having previously raised the effective policy rate by three points to the upper band of the corridor following the start of the conflict, the bank has been unable to pursue monetary easing due to the ongoing pressure on inflation and the currency.

Data from the July 2026 Sectoral Inflation Expectations report, prepared in coordination with the Turkish Statistical Institute (TurkStat), reveals a divergence in outlooks. Market participants have adjusted their 12-month annual consumer inflation expectations upward by 0,14 points to yüzde 23,95. In contrast, the real sector’s expectations fell by 0,60 points to yüzde 32,50. Household sentiment remains cautious, with consumers identifying food, fuel, and energy as the primary drivers of inflation. According to the Household Expectations Survey, while household expectations for inflation 12 months out fell to yüzde 44,94, the proportion of those expecting inflation to decline increased by 1,93 points compared to the previous month to yüzde 17,63.

Global Inflation Expectations and the U.S.-Iran Conflict

The ongoing fighting between the U.S. and Iran continues to constrain global oil and gas flows, complicating the path for central banks globally. While gasoline prices have retreated from earlier peaks, economists warn that the year-on-year pressure on pump prices remains significant, with gas up approximately 70 cents from last year. Mark Finley, an economist at Rice University, noted the psychological weight of these costs, stating that energy prices are the one thing that is broadcast from every street corner, and as such, they have an outsized impact not only on inflation and inflation expectations but also on factors like consumer confidence.

Experts are concerned about the long-term implications if the conflict continues. Yelena Shulyatyeva with The Conference Board noted that if the conflict drags on, consumers may react more significantly, potentially leading to an unsustainable pickup in inflation expectations. Andy Glover, a research and policy advisor at the Federal Reserve Bank of Kansas City, explained that if expectations rise, propagation effects occur, noting that when employees start asking for higher wages, firms start raising their prices because they expect their suppliers to do the same, which can become embedded and cause persistently higher inflation that is much more difficult to eliminate using monetary policy.

Survey Data and Market Reactions in the UK

Evidence from the United Kingdom offers a different perspective on inflation sentiment. A June 2026 survey of 2,021 adults conducted by Citi and YouGov indicated that public expectations for future inflation have continued to recede. Expectations for inflation five or more years out fell to 3.9% in June from 4.0% in May. Year-ahead expectations slid to 3.8% from 4.7%.

Citi economist Callum McLaren-Stewart stated that given such a sharp retracement and with levels now near their pre-conflict status, he believes the risk of de-anchoring is fading. McLaren-Stewart added that they expect inflation expectations to unwind further, specifically in light of the memorandum of understanding (MOU) between the United States and Iran. This sentiment aligns with broader planning scenarios that hinge on the possibility of a peace agreement being signed before the U.S. midterm elections on November 3.

The Path Forward

The CBRT’s recent decision to keep rates unchanged indicates a baseline scenario where temporary inflation spikes in July may give way to potential interest rate cuts by September, provided the war-related shocks subside. Meanwhile, in the U.S., Kevin Warsh noted in a July 1, 2026, discussion that inflation expectations and risks have come down. As the international community monitors the situation, the tension between maintaining economic growth and controlling inflation remains the central challenge for global central banks. The effectiveness of future monetary policy will likely depend on whether these institutions can maintain public confidence in their ability to manage price pressures amidst geopolitical instability.