Citi Signals Tightening Room for TCMB: Rate Cuts Deferred as Inflation Risks Linger

Citigroup economists have issued a warning regarding the limited maneuvering room for the Central Bank of the Republic of Turkey (TCMB) in the second half of the year, projecting that the policy rate will end the year at 35 percent. The analysis note signed by Ilker Domaç and Gültekin Işıklar emphasizes that current economic balances and geopolitical risks will significantly constrain the bank's rate-cut timeline.

Squeeze on Policy Rates and Funding Costs

The bank's analysts note that the TCMB is currently sustaining funding through the more expensive overnight rate, though the timing of a shift back to the one-week repo rate remains contingent on market conditions. Key highlights from the report include:

■The process of aligning the TCMB's average funding cost of 40 percent with the 37 percent policy rate will depend on the pace of capital inflows and dollarization dynamics.

■While rate cut steps are expected to be gradual, a cautious stance is predicted to persist.

■The limited room for the second half signals that tight monetary policy conditions will continue for the foreseeable future.

Divergence from Inflation Targets Deepens

Pressure stemming from geopolitical uncertainties and fluctuations in oil, gas, and food prices has forced the TCMB to revise its inflation forecasts upward. Citi analysts point out that this increases the pressure on policymakers.

■The TCMB raised its year-end inflation forecast from 26 percent to 28 percent.

■The bank's 2026 inflation forecast of 28 percent sits 4 points above the intermediate target of 24 percent.

■The widening gap, which was 2 points in May, is noted to overshadow the effectiveness of the target in anchoring inflation expectations.

■Citi projects that inflation in Turkey will show a slight ascent, rising from 30.9 percent at the end of 2025 to 31.8 percent by the end of 2026.

Markets are pricing in that the stickiness in commercial lending rates will persist, and the reduction of funding costs from the 40 percent level will take time. The caution in the TCMB's process of aligning average funding costs with the policy rate could significantly slow down the growth pace of commercial credit volumes, especially for SME loans. The relaxation of macroprudential measures is conditional on inflation expectations being anchored downward; until then, liquidity management and risk pricing for banks will remain of critical priority.