Turkey Maintains 37% Rate Despite 32% Inflation, Trade Deficit

Turkey’s central bank maintained its tight monetary policy in April 2026 despite persistent inflation and slowing economic activity, keeping its main interest rate at 37 percent to defend the lira and restrict credit, according to the bank’s latest policy decision.

The central bank has limited lira devaluation to 5 percent since the start of the year, with the currency trading at 45.17 to the dollar as of May 5, 2026. Foreign exchange reserves surged from $41.6 billion at the end of March to $53.2 billion by April 24, backed by gold reserves of $110 billion, reflecting inflows via the carry trade, according to the bank’s data.

Inflation Persists Despite Rate Holds

Despite the high interest rate, 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 acknowledged that “indicators point to a slowdown in economic activity,” citing the war and high borrowing costs as factors affecting growth.

Manufacturing Activity at Two-Year Low

The purchasing managers’ index (PMI) from the Istanbul Chamber of Industry fell to 46 points in April, its lowest level since September 2024, well below the 50-point threshold indicating expansion in the manufacturing sector, according to data from S&P Global. Andrew Harker, economics director at S&P, stated: “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.”

The International Monetary Fund cut its growth forecast for the Turkish economy to 3.4 percent in April.

Export Weakness, Trade Deficit Widens

The policy of controlling the exchange rate to keep the lira strong has created unintended consequences. March exports fell to $22 billion, down 6 percent year-on-year, while imports rose 8 percent to $33 billion, leaving a trade deficit of $11 billion for the month, according to Turkstat (Turkish Statistical Institute).

Professor Emre Alkin, an economist at Topkapı University, told AGBI: “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 noted that keeping the lira strong means Turkish exports become expensive while imports are more attractive, which have “negatively affected the external balance.”

Economist Mustafa Sönmez attributed the trade contraction to broader global factors: “Due to the war, foreign trade volume has narrowed globally. Turkey’s exports, particularly to the war region, have dropped while a key import item – energy – has gone up.” Sönmez predicted the trade deficit would continue to grow through April and beyond “especially if the war in the Gulf is not ended soon.”