Turkish central bank cuts rates after 18 months of tightening efforts

Reuters

Turkey's central bank cut its key interest rate by 250 basis points to 47.5% on Dec. 26, 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, opens new tab after an 18-month tightening effort that reversed years of unorthodox economic policies and easy money championed by President Recep Tayyip Erdoğan, who has since changed tack to back the programme.

The rate, last cut in early 2023, had been held at 50% since March. Annual inflation, opens new tab dipped to 47% last month in what the central bank believes is a sustained fall toward a 5% 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. Erdoğan's announcement this week that the minimum wage would rise by a less-than-requested 30% in 2025 bolstered these predictions.

Policy turnaround

In a turnaround a year and a half ago, Erdoğan 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% in 2022 and 75% earlier this year, while the lira has plunged 90% 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.

Erdoğan'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 Erdoğan 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% by the end of 2025, with forecasts ranging between 25% and 33%.

The bank expects inflation to fall to 21% 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% in November due mostly to food prices.

The 30% 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% requested by the workers' union.

The government said it was set to maintain fiscal discipline and continue the inflation fight.

Erdoğan - 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.

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