Turkish central bank cuts interest after 2-year hiatus

The Central Bank of the Republic of Türkiye (CBRT) Thursday announced a 250 basis point reduction in the policy interest rate, lowering it to 47.5%, marking its first rate cut since Feb. 22, 2023.

This decrease surpassed market expectations of a 150 basis point cut, which was indicated in CBRT’s market participants survey for December.

The CBRT set the policy rate at 50% on Mar. 22 and held it steady for eight consecutive months, including the decision in November. This change follows a decline in Türkiye‘s annual inflation to 47.09% over six consecutive months.

The bank set the borrowing and lending rates at 46% and 49%, respectively.

Following the announcement, foreign currency exchange rates remained steady, with USD/TRY at 35.22, EUR/TRY at 36.62, and GBP/TRY at 44.16 as of 11:20 a.m. GMT. Türkiye’s stock exchange, Borsa Istanbul’s BIST 100 index, maintained its slight increase from the opening, rising by 0.65% to 9,980.61.

‘Tight monetary stance will be maintained’

In a written statement released following the meeting, the Monetary Policy Committee reiterated that it would take further decisions focused on the inflation outlook. ‘The underlying trend of inflation was essentially flat in November,’ the statement pointed out, while domestic demand is slowing, and services inflation improved.

“The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and inflation expectations converge to the projected forecast range,” the statement remarked.

The statement emphasized that the policy rate will be set to maintain the necessary level of tightness for the anticipated disinflation path, considering both actual and expected inflation trends.

“Indicators of inflation and underlying trend of inflation will be closely monitored,” the statement concluded.

First insights

Chairman of the Istanbul Chamber of Commerce (ITO) Sekib Avdagic stated that the Central Bank of Republic of Türkiye’s (CBRT) interest rate cut decision aligned with market expectations and enhanced economic predictability. “In 2025, financing conditions will depend on developments in inflation, interest rates, and exchange rates, and we are confident a balance will be struck among these factors,” Avdagic said, praising the CBRT’s move.

However, Turkish economist Mahfi Egilmez criticized the decision in light of minimum wage debates, noting, “The demands of small and large tradespeople have been met. As always, the burden of inflation falls on the workers.”

Economist Baris Soydan described the CBRT’s decision as a milestone for future actions but raised concerns about ongoing uncertainties and unanswered questions. He commented: “For the future, CBRT stated, ‘We will review this at every meeting,’ implying that it might pause in between. This statement seems hawkish. Will it truly be so, or has an uninterrupted rate-cutting process begun? This will determine what happens next.”