I have said many times that interest rates do not lead inflation but react to it, and what we are seeing in Turkey right now is a central bank attempting to hold the line as external pressures rise, because the Central Bank of the Republic of Turkey has kept its benchmark rate at 37% while warning that inflation risks are increasing again, largely due to geopolitical tensions and rising energy costs tied to the Iran conflict.
This decision is not a sign of stability, but rather a reflection of constraint, because inflation in Turkey remains elevated above 30%, and the central bank itself is acknowledging that price pressures could accelerate again, particularly as energy imports become more expensive and global uncertainty feeds into domestic costs.
What many overlook is that Turkey’s economy is deeply integrated with the West, both financially and structurally, which means it is highly dependent on foreign capital inflows, dollar-based trade, and access to international financing. That connection ultimately limits its policy flexibility, despite political rhetoric about independence.
Turkey relies heavily on imported energy, and when global oil prices rise, those costs immediately feed into inflation, forcing policymakers to maintain higher interest rates to defend the currency and prevent capital flight, even though those same high rates put pressure on domestic growth and credit conditions.
This creates the classic dilemma that I have described for decades, where a country does not fully control its own economic direction because it must constantly respond to shifts in global capital flows, and when confidence declines due to war, inflation, or instability, capital moves quickly, leaving policymakers with limited options.
The Iran war has added a new layer of pressure, because disruptions to energy markets and rising geopolitical risk reduce investor confidence, and when that happens, countries like Turkey must offer higher returns to attract or retain capital, which explains why rates remain elevated despite the strain on the economy.
At the same time, maintaining high rates for an extended period slows economic activity, increases borrowing costs, and creates internal stress within the financial system, which leads to a growing conflict between political objectives and economic realities that cannot be resolved easily.
This is where Turkey’s position becomes particularly fragile: it is trying to balance its role between East and West, maintaining access to Western capital markets while pursuing an independent foreign policy. But when financial pressure rises, the reality is that capital flows dictate outcomes regardless of political intent.