Iran war puts Turkey’s inflation fight, lira under fresh pressure
A prolonged Iran war is leaving Turkey's economy management caught between maintaining painful monetary tightening and cutting rates before the economy is ready.
ANKARA — Turkey’s economy management face an increasingly difficult choice as the Iran war pushes energy prices higher: Keep interest rates restrictive and deepen the strain on businesses and growth, or ease policy and risk renewed pressure on inflation, the lira and central bank reserves.
The Turkish Central Bank kept its policy rate unchanged at 37% on Thursday, signaling that it expects inflationary pressures to persist. Annual inflation stood at 32% in June, according to official data, down from 85% in late 2022 but still stuck above 30%.
With inflation proving resistant to further declines, the Iran war threatens to make the task facing Turkey’s economic management even harder. While rising energy prices will feed directly into consumer prices, widen the current account deficit and increase pressure on the lira, policymakers have diminishing room to maneuver. Further tightening risks deepening the slowdown and worsening financing strains on businesses, while premature easing could accelerate dollarization, capital outflows and the depletion of central bank reserves.
The war has come at a delicate moment for Turkey’s economy. After launching an aggressive monetary tightening campaign in 2023, the central bank raised its benchmark rate from 8.5% to 50% between June 2023 and March 2024 in an effort to rein in soaring inflation.
