Turkey’s central bank cut its key interest rate by 250 basis points to 47.5 per cent on Thursday, a bit more than expected, launching an easing cycle meant to leave behind protracted economic turmoil and a cost-of-living crisis.
It trimmed the one-week repo rate after an 18-month tightening effort that reversed years of unorthodox economic policies and easy money championed by President Tayyip Erdogan, who has since changed tack to back the programme.
The rate, last cut in early 2023, had been held at 50 per cent since March. Annual inflation dipped to 47 per cent last month in what the central bank believes is a sustained fall toward a 5 per cent target over a few more years.
Having launched the easing cycle, the bank’s policy committee said it will set policy “prudently on a meeting-by-meeting basis with a focus on the inflation outlook,” and respond to any expected “significant and persistent deterioration”.
It said leading indicators point to a declining underlying inflation trend in December and that demand continued to slow in the fourth quarter, with disinflation in progress.
In a Reuters poll last week, 14 of 17 respondents expected the bank to cut rates by between 100 and 250 basis points. Erdogan’s announcement this week that the minimum wage would rise by a less-than-requested 30 per cent in 2025 bolstered these predictions.
A research note by QNB said the central bank’s comments indicated an intent to proceed with rate cuts in a controlled manner. QNB expects annual inflation to dip slightly below 40 per cent by March 2025.
“Accordingly, we see a strong likelihood of 250 basis point cuts at each of the two meetings in the first quarter,” the note said.
The lira currency briefly touched an all-time low of 35.3005 after the rate cut, before firming to 35.2075 at 1135 GMT. Turkey’s main stock index BIST-100 (.XU100) rose 0.8 per cent.
TURNAROUND IN POLICY
In a turnaround a year and a half ago, Erdogan appointed a new central bank leadership with independence not seen in years, and it aggressively tightened policy by 4,150 basis points in order to slay years of soaring prices and a crashing currency.
Annual inflation had touched 85 per cent in 2022 and 75 per cent earlier this year, while the lira TRYTOM=D3 has plunged 90 per cent in seven years – from 3.8 to 35.3 to the dollar, eroding the earnings and savings of a generation of working and middle class Turks.
Erdogan’s drive over this earlier period to slash borrowing costs despite rising prices hammered central bank credibility, wiped out much of its reserves, sent foreign investors fleeing and spawned costly state-backed policies to halt dollarisation.
All of these have now begun reversing or have recovered under the more orthodox approach, which Erdogan has backed, even as businesses and households were strained this year by slow growth, high borrowing costs and still-high prices.
According to the Reuters poll’s median, the central bank was expected to ease rates to about 28.5 per cent by the end of 2025, with forecasts ranging between 25 per cent and 33 per cent.
The bank expects inflation to fall to 21 per cent by end-2025. To determine its easing path the bank is closely monitoring monthly inflation, which has been higher than expected in recent months including 2.24 per cent in November due mostly to food prices.
The 30 per cent administered rise in the minimum wage, to a net monthly 22,104 Turkish lira ($627), will exert some upward pressure on prices in coming months. But the level fell well short of the 70 per cent requested by the workers’ union.
The government said it was set to maintain fiscal discipline and continue the inflation fight.
Erdogan – who as recently as early 2023 declared rates would fall “as long as I am in power” – has said little about the latest monetary tightening cycle. Last month he said, however, that inflation would fall alongside the interest rate.
The central bank earlier announced that it had reduced the number of scheduled policy meetings next year to eight from 12 in 2024.
