Turkish Central Bank's High-Wire Act: Karahan Defends Aggressive Interventions to Shield the Lira

Turkish Central Bank Governor Fatih Karahan has become the face of Ankara’s battle to stabilize the lira, a currency that has oscillated between volatility and fragile calm amid aggressive policy measures. In recent months, Karahan has repeatedly defended the CBRT’s interventions, including historic interest rate hikes and market operations, as essential to curbing inflation and preventing a loss of investor confidence. Yet with the lira down over 20% against the dollar year-to-date and global markets wary of emerging-market risks, the central bank’s strategy remains under intense scrutiny.

The Policy Hammer: Rates at 46% and Beyond

Karahan’s playbook has relied heavily on monetary tightening, most notably raising the Central Bank overnight lending rate to a record 46% in March 2025. This move, alongside the suspension of one-week repo auctions to limit liquidity, aims to shore up short-term borrowing costs and deter capital flight.

The CBRT’s stance is clear: tight money until inflation stabilizes. Consumer inflation, though down to 39.1% in February 2025 from 2024’s peaks, remains stubbornly above the bank’s 7% target. Karahan argues that patience is required, noting that “a permanent fall in inflation” requires sustained policy discipline.

Inflation, Imports, and the Current Account

Karahan’s optimism is bolstered by improvements in Turkey’s external balance. The current account deficit narrowed to just 0.8% of GDP in late 2024, a marked contrast to 2023’s 3.5% deficit. This reflects both slowing import growth—driven by weaker domestic demand—and a rebound in tourism and remittances.

However, risks loom. A strong dollar, rising global interest rates, and geopolitical tensions (e.g., Turkey’s role in Middle East diplomacy) could reignite lira pressures. Karahan acknowledges these challenges but emphasizes the CBRT’s readiness to act: “We will use all tools necessary to defend financial stability.”

Political Dynamics and Central Bank Independence

Karahan’s extended tenure—his term was controversially prolonged to 2027 in 2023—underscores the Turkish government’s preference for policy continuity. While critics argue this undermines central bank independence, the administration defends it as necessary to align monetary and fiscal goals.

President Erdoğan’s repeated calls for lower interest rates create tension, but Karahan has so far resisted political pressure. “The CBRT’s mandate is price stability,” he stated in May 2025, a reminder of his institutional role.

Investor Takeaways: Risks and Opportunities

For investors, Turkey presents a paradox. On one hand, high real yields (the 46% rate vs. 39% inflation implies a negative real rate, but structural reforms could shift this) and undervalued assets (the BIST 100 index trades at 8x forward earnings vs. 15x for emerging markets) offer entry points.

On the other hand, the lira’s volatility and geopolitical exposure (e.g., energy security, regional conflicts) amplify risks. Portfolio inflows have been tepid, with foreign investors selling TRY-denominated bonds in Q1 2025.

Conclusion: A Delicate Balancing Act

Karahan’s strategy hinges on two critical assumptions: that inflation will trend downward without severe economic contraction and that global conditions will not force a sudden tightening of external financing. The data so far offers mixed signals:

• Positive: Current account improvements, declining inflation momentum, and strong tourism revenue.
• Negative: Persistent inflation above 30%, lira weakness, and political uncertainty.

Investors must weigh these factors. While the CBRT’s aggressive stance has bought time, a sustained rebound in the lira will require more than policy measures—it will need a coordinated effort to rebuild investor trust. For now, Turkey remains a high-risk, high-reward bet, best approached with a long-term horizon and a close eye on both domestic policy and global market shifts.