Turkey Surprises Markets with Aggressive Interest Rate Cut as Inflation Slows
Central bank slashes rate by 250 basis points to 40.5%, signaling confidence in easing inflation, but risks remain.
Turkey’s central bank delivered a sharper-than-expected interest rate cut on Thursday, lowering its benchmark rate by 2.5 percentage points as signs of easing inflation continue to emerge.
In a statement following its monetary policy meeting, the bank announced it was reducing the one-week repo auction rate from 43% to 40.5%, a move equivalent to a 250 basis-point cut. The decision comes amid growing optimism that inflation in the country is slowing.
This marks the second rate cut since April, when the bank hiked the key rate to 46% in response to political unrest tied to the jailing of Istanbul’s opposition mayor. In July, the bank began loosening monetary policy, trimming the rate by three percentage points.
According to official data released last week, annual inflation in Turkey dipped to 32.95% in August, down slightly from 33.52% in July. The decrease, though modest, bolstered expectations for further rate reductions.
Despite the rate cut, the central bank cautioned that inflationary pressures still linger, particularly in the food and services sectors.
“While growth exceeded projections in the second quarter, final domestic demand remained weak,” the bank noted. “Recent data suggest that demand conditions remain disinflationary.”
The statement also acknowledged that inflation expectations, pricing behavior, and global economic developments continue to pose challenges to the country’s disinflation path.
“We will maintain a tight monetary policy stance until price stability is achieved,” the bank added.
The aggressive move signals growing confidence by Turkish policymakers in the country’s economic direction but with inflation still above 30%, questions remain about whether the central bank’s optimism is premature.
