Turkey’s Central Bank surprises markets with sharp rate cut as inflation eases

The Central Bank of the Republic of Turkey (CBRT) recently made a significant decision to cut its benchmark one-week repo rate by 250 basis points, bringing it down to 47.5%. This move was larger than expected and marked a shift in monetary policy after a series of consecutive meetings.

This decision was made in light of a consistent decline in inflation, with the annual consumer price index (CPI) reaching its lowest level since June 2023. The CBRT noted that leading indicators suggest a further decline in the underlying trend in December, with domestic demand continuing to moderate. While core goods inflation remains low, there are signs of improvement in service sector prices. Additionally, unprocessed food inflation, which had been high, appears to have eased in December.

The central bank highlighted that its tight monetary stance is contributing to disinflation by moderating domestic demand, strengthening the Turkish lira, and improving inflation expectations. However, it also acknowledged that inflation risks persist and committed to maintaining a prudent approach to monetary policy.

Looking ahead, the CBRT reiterated its medium-term inflation target of 5%, with a tolerance band of 2%. It projects inflation to decline to 21% by the end of 2025 and 12% by the end of 2026. The bank’s new set of projections is seen as more attainable, but the projected delay in the disinflation process may draw attention.

Turkey’s efforts to stabilize its economy have been recognized internationally, with Standard & Poor’s upgrading the country’s long-term sovereign credit rating. The agency cited improved monetary policy, lira stabilization, and foreign currency reserve rebuilding as positive factors. Despite these achievements, challenges remain, with the OECD forecasting a slowdown in GDP growth in the coming years due to necessary macroeconomic stabilisation measures.

Following the rate cut decision, the Turkish lira remained stable, and market reactions have been generally positive. As Turkey continues on its path towards disinflation and economic rebalancing, the CBRT’s strategy of tight monetary policy and coordination with fiscal measures will be crucial in achieving long-term stability.
Turkey’s Central Bank has taken markets by surprise with a sharp rate cut, as inflation in the country has started to ease. The bank announced a 200 basis point reduction in its key interest rate, bringing it down to 17%.

This move comes as a shock to many analysts, who were expecting a more modest cut of around 100 basis points. The Central Bank cited the recent slowdown in inflation as a key factor in its decision, with the annual inflation rate dropping to 18.7% in November from a peak of 25% earlier in the year.

The rate cut is seen as a bold move by the Central Bank, as the Turkish economy continues to face significant challenges, including a currency crisis and high levels of external debt. However, the bank’s decision to prioritize inflation control over other concerns has been welcomed by investors, who see it as a positive step towards stabilizing the economy.

Despite the surprise rate cut, some analysts remain cautious about the outlook for the Turkish economy, citing ongoing political and economic uncertainties. However, for now, the Central Bank’s move has provided a much-needed boost to investor confidence and is likely to support economic activity in the coming months.
Central Bank of the Republic of Turkey, CBRT, repo rate, monetary policy, inflation, disinflation, domestic demand, Turkish lira, inflation expectations, credit rating, economic outlook, GDP growth, market reactions, euro-lira exchange rate, fiscal measures, long-term stability.
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