Turkey’s central bank has reduced its key interest rate for the first time in nearly two years, aiming to address persistent double-digit inflation.
The monetary policy committee announced a rate cut from 50% to 47.5%, citing improvements in “inflation expectations and pricing behavior.” The last interest rate reduction occurred in February 2023.
Policy Shift and Inflation Trends
The central bank began raising rates last year after President Recep Tayyip Erdogan adopted a more conventional monetary stance to combat soaring prices. Since March, the rate had been maintained at 50%.
Thursday’s decision marks the beginning of an easing cycle following eight months of steady policy. Officials noted that their tight monetary approach is helping reduce inflation’s monthly trend and strengthening the disinflation process.
In November, Turkey’s annual inflation rate dropped for the sixth consecutive month, settling at 47.1%. The central bank revised its 2024 year-end inflation forecast to 44%, up from its earlier estimate of 38%.
Strategic Approach Moving Forward
The bank stressed its commitment to maintaining a tight policy framework while closely monitoring inflation trends. Decisions will be made prudently, guided by data and economic conditions, with fewer policy meetings planned for the coming year.
“The Committee will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook,” the bank said. It pledged to decisively use all tools at its disposal to achieve price stability within a predictable and transparent framework.
Reactions and Economic Context
Hakan Kara, a former chief economist at the central bank, called the move a “very reasonable and balanced start” and emphasized the importance of complementary fiscal policies.
The rate cut coincides with a 30% increase in Turkey’s minimum wage, bringing it to 22,104 lira ($600) starting January 1. The increase, however, falls short of the workers union’s demand for a 70% raise.
President Erdogan lauded the wage hike, reiterating the government’s commitment to protecting workers from inflation: “We once again remained true to our promise not to let our workers be crushed by inflation.”
The central bank’s approach highlights a cautious balance between easing inflationary pressures and fostering economic stability.
