Economy
Turkish central bank keeps rates steady, monitors conflict impact
The Turkish central bank kept its key policy rate unchanged at 37% on Thursday, holding steady for a third straight meeting as it monitors the inflation impact of the Iran war.
The Central Bank of the Republic of Türkiye (CBRT) also cited that the underlying trend of inflation “decreased slightly in May,” while also suggesting that the first quarter data points “to a slowdown in economic activity and leading indicators suggest a continued weak course in domestic demand.”
“The underlying trend of inflation, which increased in April due in part to higher energy prices, following its rise in the first months of the year, decreased slightly in May,” the bank said following its closely watched Monetary Policy Committee (MPC) meeting.
However, the bank warned that energy prices “remain volatile and elevated,” amid geopolitical developments and the resulting uncertainties.
Oil and gas prices have surged significantly since the start of the Iran conflict, with Brent crude briefly hitting peaks of nearly $120 a barrel. Following easing in recent weeks, the prices have spiked again in recent days amid the renewed risk of attacks between the U.S. and Iran.
Analysts were widely expecting the bank to keep the cautious approach and leave rates on hold this week. A smaller number of economists were forecasting a hike. In a Reuters poll, 12 of the 14 economists surveyed predicted no change to borrowing costs, while two forecast a rate hike.
The committee has also kept the central bank’s overnight lending rate and the overnight borrowing rate at 40% and 35.5%, respectively. The bank uses the rate corridor to adjust the cost of funding to the market when necessary without changing the benchmark rate.
Annual inflation in Türkiye edged up to 32.6% in May from 32.4% in April, official data showed last week.
Since the war started at the end of February, the CBRT has halted an easing cycle that began in late 2024 and taken other liquidity steps that pushed the lira overnight rate up to the 40% limit.
Impact ‘closely monitored’
The war-related surge in energy prices has weighed on import-heavy economies like Türkiye, although authorities have introduced measures to cushion its impact on consumers, mainly through a so-called “sliding scale” system that limited fuel prices.
In its quarterly inflation report in May, the central bank raised its end-2026 interim inflation target to 24% from 16%, forecasting that the short-term inflationary effects of the Iran war would remain “pronounced.”
“The impact of geopolitical developments on the inflation outlook through the cost channel, economic activity and expectations is closely monitored,” the bank also said.
“The tight monetary policy stance, which will be maintained until price stability is achieved, will strengthen the disinflation process through demand, exchange rate, and expectation channels,” it added.
It also reiterated that the committee “will determine the policy rate by taking into account realized and expected inflation and its underlying trend in a way to ensure the tightness required by the projected disinflation path in line with the interim targets.”
The bank also underscored its meeting-to-meeting approach and “focus on inflation outlook.”
The Turkish lira held steady at 46.1550 against the dollar after the announcement, while the main Istanbul share index was slightly higher.
Railway infrastructure could be one of the areas in which a major European multilateral lender could cooperate with Türkiye, its senior official said, according to a transcript of an interview released on Thursday.
“Railway infrastructure could be one of the areas where we can contribute in the future,” said Robert de Groot, vice president of the European Investment Bank (EIB).
Answering questions posed by Anadolu Agency (AA) regarding the bank’s relations with Türkiye and its activities across the European Union, de Groot first evaluated the financing agreements the EIB has signed with the Türkiye Development and Investment Bank (TKYB) and Türk Eximbank.
The bank recently said it would provide 200 million euros (more than $230 million) to Türkiye to back investments in renewable energy, energy efficiency and sustainable industrial production.
Highlighting the importance of green energy and energy efficiency, which are the focus of the agreements, de Groot underscored that efficiency holds “a significant place” on the business agenda.
“Energy efficiency means reducing the need for energy, which we are to some extent dependent on today due to geopolitical developments, by consuming less. Companies are looking for ways to reduce their energy consumption and maximize the use of renewable energy. Therefore, whether in Türkiye or elsewhere in Europe, energy efficiency holds a significant place on the agenda of almost every businessperson you talk to,” he told AA.
De Groot also addressed the impact of the credit they provided in 2023 for the earthquake zone, sharing his observations from his visit to Hatay, one of the cities harshly impacted by powerful tremors that struck southeast Türkiye in February that year.
“People have suffered deeply and continue to do so. This has affected me profoundly. Nevertheless, their determination to rebuild Antakya and Hatay also impressed me,” he said.
“Rebuilding a city is not easy, and various challenges inevitably arise. However, I was pleased to see the progress in the work aiming to provide people with access to drinking water, a responsibility the EIB has undertaken.”
De Groot stated that he sees the visits they have made to Hatay, Ankara and Istanbul as the start of a new era in the relations between the EIB and Türkiye, hoping for a strong project pool to be formed quickly in this context.
Noting that their representation in Istanbul will work to determine new projects that the EIB can finance, de Groot spoke about future cooperation areas.
“I know that Türkiye has big plans to expand and modernize its railway infrastructure. Within the EU, we are working in the same area. We have significant expertise in this regard. Therefore, railway infrastructure could be one of the areas where we can contribute in the future,” he said.
EU defense push
De Groot also touched upon EIB’s activities across the EU, pointing to the need for EU countries to increase investments, especially in the defense sector, and the commitments of NATO countries to increase defense spending.
Telling that EU leaders have requested financial support from the EIB in the field of defense, De Groot said they continue to work in this direction.
“A significant portion of our financing to the EU is directed towards infrastructure, which has not been sufficiently invested in for many years,” he maintained.
De Groot stated: “We are investing in R&D efforts for new technologies. We are supporting the increase in production capacity of the defense industry in Europe. Additionally, we are trying to support SMEs involved in the supply chains of major European defense companies.”
Provided resources
Operating as the bank of the European Union, the EIB has been offering loans and technical support to thousands of projects in more than 160 countries since 1958, making it one of the largest multilateral development banks in the world.
The bank, which started its activities in Türkiye in 1965, has provided a total of 30.86 billion euros in financing for 263 projects in the country so far, primarily in areas such as transportation, urban infrastructure, climate action, energy, agriculture, and the development of the private sector, as per AA.
Notable agreements between the bank and Türkiye include a 400 million euro loan agreement signed to repair water and wastewater infrastructure in the region following the earthquakes centered in Kahramanmaraş on Feb. 6, 2023.
Additionally, two separate financing agreements totaling 200 million euros were signed in recent days from the bank’s resources. Thus, 100 million euros will be provided for sustainable industrial investments through TKYB, and 100 million euros will be available for green financing projects by Turkish exporters through Türk Eximbank.
The European Central Bank (ECB) on Thursday became the first major central bank to hike interest rates in response to the Iran war as policymakers wrestle with how to confront the inflation fed by sharply higher oil prices.
The ECB’s rate-setting council raised its benchmark rate to 2.25% from 2%, where it had been for a year. The move comes ahead of rate-setting meetings next week at the Federal Reserve (Fed), the Bank of Japan (BOJ), and the Bank of England (BoE).
Oil prices have risen sharply due to Iran choking off the flow of crude oil through the Strait of Hormuz, the sea passage for a fifth of the world’s oil and fuel products during normal times.
Raising rates aims to dampen the consumer price inflation fed by higher costs for products made from crude such as gasoline, diesel fuel, cooking gas and heating oil.
International benchmark Brent crude was trading just below $92 per barrel on Thursday, up from around $73 on the eve of the war. That has helped push inflation to 3.2% in May in the 21 countries that use the euro currency, above the ECB’s target of 2%.
But ECB policymakers must also consider the impact of higher borrowing costs on an economy showing only modest growth.
That has led analysts to think Thursday’s hike will be a one-and-done moment, aimed mainly at signaling to financial markets that the bank is determined not to get behind the curve if inflation spirals higher.
Raising benchmark rates influences what lenders charge throughout the economy, increasing the cost of borrowing money to buy things and thus dampening demand for goods. Higher central bank rates can send interest costs higher for home purchases, investment in new factories, and government borrowing.
The ECB may be able to get by with only one or two increases because the inflationary surge may be milder than feared, said Carsten Brzeski, global chief of macro at ING bank.
That is because consumers burned by the post-pandemic spike in inflation are in no mood to pay higher prices, leaving businesses little choice but to swallow higher energy costs.
“The pass-through of higher energy and input prices to final consumption will be limited due to a lack of ability and willingness of consumers to actually pay for these higher prices,” he wrote in an emailed comment to The Associated Press (AP).
The World Bank slashed on Thursday its global growth forecast for 2026 to 2.5% due to the war in the Middle East, warning growth could slow to just 1.3% if energy supply disruptions prove more severe and come with substantial stress in financial markets.
Global growth reached 2.9% in 2025, the bank said in its semi-annual Global Economic Prospects, up 0.2 percentage points from its estimate in January.
Its 2026 forecast is down 0.1 percentage point from January, the lowest seen since the COVID-19 pandemic that began in late 2019.
The bank lowered forecasts for two-thirds of countries as a result of the war, with the biggest cuts affecting the United Arab Emirates (UAE), Iraq and other countries in the Middle East whose energy exports have been hit hard by the conflict.
The World Bank’s stark outlook comes as the war launched by U.S. and Israeli strikes on Iran on Feb. 28 drags into a fourth month.
It has sent energy prices up sharply due to the closure of the Strait of Hormuz, renewed inflationary pressures worldwide and fueled expectations of tighter monetary policy across many countries.
Fertilizer prices are also up sharply, raising concerns about a major food supply crisis.
Oil prices closed nearly $2 higher on Wednesday after U.S. President Donald Trump said the U.S. would attack Iran “very hard” if no peace deal was finalized, following one of the most significant exchanges of fire since an April ceasefire.
The World Bank said its baseline forecast assumed an average Brent crude oil price of $94 for the year, up 36% from 2025, and that the worst disruptions to energy supplies would abate by the end of July, with global headline inflation seen at 4%.
It said growth could slow to 2.1% if the energy disruptions lasted longer and oil prices averaged $115 per barrel this year, which could drive inflation to 4.4%. The outlook would worsen further, with growth decelerating to just 1.3%, if the energy shock affected financial markets, resulting in lower energy prices, greater volatility and weaker confidence, it said.
“These risk scenarios show how quickly the outlook could weaken if energy and financial pressure reinforce each other,” Ayhan Kose, the World Bank’s deputy chief economist, said. If the energy shock triggered a financial market shock, confidence could erode quickly, he said.
Growth lower than last decade
Global growth is expected to improve to 2.8% in 2027 and 2028, but that remains 0.4 percentage points below the average rates seen during the 2010s due to a slew of factors, including slower population growth, slower private investment growth, falling public investment, rising public debt and slower growth in trade, World Bank chief economist Indermit Gill said.
“The world economy is a lot less resilient today than it was in 2008 and even as compared with 2018,” Gill told reporters, predicting the next years would be marked by high policy uncertainty, inflationary pressures and high interest rates.
Weak growth in developing economies has stalled progress toward advanced-economy income levels, with dozens of developing countries other than China and India looking at a “lost decade” in which they saw no progress on narrowing their per capita income gap with advanced economies, the report said.
Developing economies have been hit harder by the war, with the bank now projecting growth at a post-pandemic low of 3.6% this year, down from 4.4% in 2025, the bank said.
The bank maintained its forecast of 2.2% growth in the U.S. economy in 2026, but said that could taper off to 2.1% in 2027 and 2% in 2028. The euro area was expected to grow by 0.8% in 2026, down from 1.4% in 2025. Japan’s gross domestic product (GDP) was forecast to grow 0.7% in 2026, down from 1.1% in 2025.
The World Bank forecast GDP growth of 4.2% in China in 2026, a downward revision of 0.2 percentage points, after 5% growth in 2025.
Middle East countries hit hardest
The lender slashed its forecast for GDP growth in the Middle East, North Africa, Afghanistan and Pakistan by 2.7 percentage points to 1.6% in 2026, down from 4% in 2025, but said growth in the region could rebound to 5% in 2027.
The United Arab Emirates was expected to see growth of 2.4% in 2026, down sharply from the January forecast of 5% and the 2025 rate of 6.2%. The bank also lowered Türkiye’s 2026 GDP growth forecast by 0.9 percentage points to 2.8%.
The World Bank said India remained the fastest-growing large economy in the world, with its GDP seen growing by 6.6% in 2026, after growth of 7% in 2025. Growth rates in India were expected to remain fairly high for the next two decades, Gill said.
The German economy is expected to recover more slowly than expected as rising energy prices following the start of the U.S.-Iran war weigh on households, companies, and exports, the Kiel Institute said in its summer 2026 forecast published Thursday.
The institute expects real gross domestic product (GDP) to grow by 0.8% in 2026 and 1.0% in 2027, cutting its 2027 forecast from 1.4% in the spring.
It said the recovery would be supported by expansive fiscal policy, especially public consumption and investment, but held back by higher commodity prices, weak competitiveness and subdued business investment.
Inflation is forecast to accelerate to 2.8% in 2026 from 2.2% in 2025, before easing to 2.3% in 2027.
The institute said higher oil and gas prices were reducing purchasing power and keeping price pressures elevated.
Private consumption is expected to grow only 0.3% this year and 0.4% next year, while exports are seen rising 1.8% in 2026 and 1.6% in 2027.
The labor market is expected to improve only gradually, with unemployment forecast at 6.3% in 2026 and 6.2% in 2027.
After years of curbs, Saudi Arabia’s authorities have reopened the kingdom’s market to imports from Lebanon, lifting a five-year ban, a statement by the official press agency indicated.
According to the Saudi Press Agency (SPA) on Wednesday evening, Riyadh justified the move by citing the encouraging measures taken by the Lebanese government to strengthen state institutions.
The import ban severed access to one of Lebanon’s most important export markets and put particular pressure on the Lebanese agricultural sector.
“This is a real turning point,” Ibrahim Tarshishi, chairperson of the farmers’ association in Lebanon’s eastern Bekaa Valley, told Deutsche Presse-Agentur (dpa).
He said the focus would now be on creating the practical conditions for resuming exports and resolving outstanding issues such as transit visas for truck drivers. “We have waited five years for such a decision,” he added.
Saudi Arabia halted imports of fruits and vegetables from Lebanon in 2021. The kingdom’s authorities justified the move at the time by citing an increase in attempts to smuggle drugs, allegedly by the Hezbollah militia, into the country via agricultural shipments.
Lebanese President Joseph Aoun welcomed the decision, describing it as an expression of Saudi support for Lebanon, intended to strengthen the economy and further solidify relations between the two countries.
In the wake of the war between Israel and Iran-backed Hezbollah, the government in Beirut aims to curb Iranian influence in the country. Observers see Saudi Arabia’s decision as an important step in supporting the Lebanese government.
U.S. President Donald Trump brushed aside concerns over rising consumer prices on Wednesday, saying he “loved” the latest inflation figures and expressing confidence that inflation would ease once the conflict involving Iran comes to an end.
Asked about U.S. government data showing consumer inflation increased at its fastest pace in three years in May, and whether it could hobble his fellow Republicans just months ahead of November’s midterm election, Trump said: “I love the inflation.”
The president then explained how he greenlit a plan to secretly move oil tankers through the Strait of Hormuz over concerns of higher costs and increasing inflation. “It was worth it to me,” Trump said about his calculus and calling the operation a success. “When it’s over, you will see oil drop to where it was before,” Trump said of the larger war. “It’s coming down. It’s going to come down like a rock.”
Trump has called the war on Iran a detour and framed it as a national security issue as Tehran’s closure of the key shipping route has pushed up the cost of gasoline, fertilizer and other goods, contributing to inflation.
Higher prices could also keep the U.S. Federal Reserve from cutting interest rates, which could lower borrowing costs, which Trump has called for since returning to power last year. Republicans are seeking to maintain control of the U.S. House of Representatives and the Senate but are concerned a consumer backlash could hand the reins to Democrats as the cost of living remains a top issue for voters.
Trump himself won the 2024 presidential election in large part because of his promise to lower inflation, but has since seen his approval rating, including on his handling of the cost of living, fall to the lowest level of his political career.
Efforts to reopen the Strait of Hormuz to tanker traffic to move goods have so far stalled, with industry executives and analysts warning that coming weeks could see another oil price shock severe enough to shake the broader financial markets.
Even if Trump and Tehran reach a deal soon, it is expected to take months to get supplies moving, with the disruptions expected through 2026. And while Americans may be more insulated from fuel shocks than other nations, ongoing higher energy prices could dent consumer spending over time.
Last month, Trump said Americans’ financial struggles were not a factor as he pushed for a deal even while threatening renewed attacks on Iran: “I don’t think about Americans’ financial situation. I don’t think about anybody. I think about one thing: We cannot let Iran have a nuclear weapon.”
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