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The Turkish central bank lowered on Thursday its key policy rate by 300 basis points (bps) to 43%, slightly above the general market consensus, resuming an easing cycle as inflation in the country continued to ease in recent months.
The Central Bank of the Republic of Türkiye (CBRT) said the underlying trend of inflation “remained flat in June,” with leading indicators suggesting “a temporary rise in monthly inflation in July due to month-specific factors.”
The bank has also reduced its overnight lending rate from 49% to 46% and the overnight borrowing rate from 44.5% to 41.5%, it said in a written statement following the Monetary Policy Committee (MPC) meeting.
Annual inflation was at 35.05% in June – down from 35.41% in May – and lowest since late 2021, according to official data. Inflation has dropped consistently from a peak of 75% in May last year.
“Recent data indicates that the disinflationary impact of demand conditions has strengthened,” the bank said.
Going forward, the central bank said it would determine the “step size” of future monetary easing “prudently” and on a meeting-to-meeting basis.
The cut, which markets read as “sizeable,” came after the bank earlier in April raised its key interest rate to 46% due to market fluctuations following the arrest of Istanbul’s mayor.
Most estimates, including those from financial institutions and polls, expected the central bank to cut rates by 250 basis points on Thursday, although they varied between 250 bps and 350 bps.
The lira currency remained stable after the decision at 40.48 to the dollar.
Meeting-to-meeting approach
The bank also underlined that the potential impact of geopolitical developments and rising trade protectionism on the disinflation process “are being closely monitored.”
Repeating its statement from the previous meeting, it also again cited that inflation expectations and pricing behavior “continue to pose risks to the disinflation process.”
It also pledged that the tight monetary policy stance, “will be maintained until price stability is achieved,” adding this would “support the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations.
“Going forward, coordination of fiscal policy will contribute to this process.”
“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,” the bank said.
It also said, “The step size will be reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook.”
“All monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen,” it pledged.
The bank also reiterated its goal to reach the 5% inflation target in the medium term. In its quarterly inflation report in May, the central bank held its year-end inflation forecast steady at 24%.
Although expected, the cut, which appeared to be slightly above the market median, came since the bank would next convene for the meeting in September, economists said.
From May 2023 until last March, the bank raised the rate from 8.5% to 50% and then kept it constant until its meeting last December, when it lowered the rate 250 basis points to 47.5%.
The bank cut the benchmark rate at its December, January and March meetings from 50% to 42.5%. At the April meeting, in a surprise move, the bank raised the rate 350 basis points to 46%, before leaving it unchanged at the June meeting.
Most economists expect easing to continue in the months ahead, with the policy rate falling to 36% by the end of 2025, according to the Reuters poll.
The monetary easing will likely continue through at least the third quarter of 2026, an earlier Reuters poll showed.
