Turkey keeps tight grip on monetary policy despite inflation

Turkey keeps tight grip on monetary policy as inflation persists | AGBI
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May 12, 2026
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Economy
Turkey keeps tight grip on monetary policy as inflation persists
By William Sellars
May 5, 2026, 7:49 AM
Alamy/MB_Photo via Reuters Connect
Shoppers at a street market in Istanbul. Higher food and housing costs led the Turkish consumer price index to rise in April
Lira devaluation limited to 5%
PMI at lowest level since 2024
Annual inflation rose to 32% in April
Turkey’s central bank appears committed to its tight monetary policy despite a stuttering economy and persistently high inflation and unemployment.
The bank has allowed only a 5 percent devaluation of the lira since the start of the year. It is trading at 45.17 to the dollar.
The central bank has also bolstered foreign exchange reserves, which rose from $41.6 billion at the end of March to $53.2 billion by April 24. This was backed by gold of $110 billion , thanks to the return of so-called hot money via the carry trade .
This has come at a cost, however. Last month the bank voted to keep its main interest rate at 37 percent, thereby defending the lira and keeping credit tight.
Nonetheless, the consumer price index jumped in April on the back of higher food and housing costs, taking annual inflation to 32 percent, according to the Turkish Statistical Institute.
The central bank said “indicators point to a slowdown in economic activity”, as the war and the high cost of borrowing both affect growth.
That impact has been underscored by the latest purchasing managers’ index (PMI) from the Istanbul Chamber of Industry, in conjunction with ratings agency S&P Global.
The index fell to 46 points in April, its lowest level since September 2024, and well below the 50 points indicating expansion in the manufacturing sector.
“Concerns around how long the effects of the conflict may persist mean that manufacturers are in a cautious mood, scaling back employment, purchasing and inventories accordingly,” wrote Andrew Harker, economics director at S&P.
The International Monetary Fund cut its growth forecast for the Turkish economy to 3.4 percent last month.
The rise in inflation and weakening industrial activity show that the government’s policy of controlling the exchange rate to keep the lira strong and restrict access to credit has missed its mark, according to Professor Emre Alkin, an economist at Topkapı University.
“After approximately three years, a picture has emerged where Turkey had become one of the most expensive countries in the world, the trend of deindustrialisation had intensified and the cost of living had increased significantly,” Alkin told AGBI .
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The policy of keeping the lira strong to maintain currency stability means that Turkish exports are becoming expensive while imports are more attractive, which have “negatively affected the external balance”, Alkin said.
That negative impact was reflected in the most recent foreign trade data.
March exports came to $22 billion, down 6 percent on the same month in 2025, according to Turkstat.
As exports retreated, imports advanced, rising 8 percent year on year in March to $33 billion, leaving a trade deficit for the month of $11 billion.
It is not just the increasing cost of imports that is having an impact on Turkey. Export markets are contracting, according to economist Mustafa Sönmez.
“Due to the war, foreign trade volume has narrowed globally,” Sönmez said.
“Turkey’s exports, particularly to the war region, have dropped while a key import item – energy – has gone up.”
The already wide deficit will continue to grow through April and beyond, said Sönmez, “especially if the war in the Gulf is not ended soon”.
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