Türkiye's central bank pivots to managing expectations, exchange rates amid Middle East crisis

Türkiye's Central Bank (TCMB) is pivoting its focus towards managing expectations and exchange rates to ensure price stability amid the economic fallout from the Middle East conflict. TCMB Deputy Governor Hatice Karahan, speaking at the Institute of International Finance (IIF) Global Outlook Forum in Washington, DC, outlined the bank's strategy in the face of the geopolitical crisis.

Supply-side shock

Karahan stated that the Middle East crisis is fundamentally a global supply-side shock and that the bank is focused on preventing external disruptions from affecting the Turkish economy. "Here it is essential to distinguish between 'temporary relative price changes' and 'persistent, broad-based inflation,'" she said. "A stronger policy response is warranted if second-round effects on core inflation, wages, and expectations begin to materialize."

Preemptive policy stance

"However, as the Central Bank of Türkiye, during a supply shock, we have to pay very special attention also to the expectations channel and the exchange rate channel; accordingly, in this recent episode, we have adopted a preemptive policy stance to contain spillovers through these channels—we effectively paused the rate cutting cycle in March and tightened funding conditions," she added.

Cautious approach

Karahan noted that the bank will continue to adopt a cautious, data-driven approach, as it is essential during this process, while anchoring expectations through its tight monetary stance. The Middle East conflict, which began Feb. 28, has disrupted global energy supplies through the Strait of Hormuz closure, contributing to inflationary pressures worldwide.