Turkey's central bank initiated a new phase in its monetary policy by lowering the key interest rate on Thursday. This move marks the beginning of an easing cycle after sustaining high interest rates since summer 2023 to counteract significant inflationary pressures.
Led by Governor Yasar Fatih Karahan, the Central Bank of the Republic of Turkey (CBRT) decided to reduce the policy rate from 50.0 percent to 47.5 percent. This decision aligns with economist expectations, which anticipated a 150-basis point rate reduction for December. The CBRT's last interest rate cut occurred in February 2023, after which a series of rate hikes were implemented.
In addition to the rate cut, policymakers opted to adjust the overnight borrowing and lending rates, setting them 150 basis points lower and higher, respectively, than the one-week repo auction rate. This move effectively narrows the interest rate corridor.
The central bank observed that the core inflation trend was largely unchanged in November, with early indicators suggesting a potential decline in December. Recent data confirmed a slight decrease in consumer price inflation, dropping to a 17-month low of 47.09 percent in November from 48.58 percent in October.
In a statement, the bank highlighted, "The firm commitment to a tight monetary stance is reducing the underlying trend of monthly inflation, strengthening the disinflation process through moderated domestic demand, real appreciation of the Turkish lira, and improved inflation expectations."
The bank reaffirmed its strategy to sustain a tight monetary stance until a significant, consistent decline in monthly inflation is observed and inflation expectations align with the projected forecast range.
Decisions by the monetary committee will continue to be data-driven and assessed on a meeting-by-meeting basis, with a strong emphasis on the inflation outlook.
ING economist Muhammet Mercan noted that the new forward guidance indicates that future rate cuts will be data-dependent, potentially moderate, and not necessarily continuous. Recent developments, such as the unexpectedly modest 30 percent increase in the minimum wage and an adjustment in the number of planned Monetary Policy Committee meetings from 12 to eight in 2025, suggest that larger rate cuts may occur per meeting.
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