The Turkish central bank has cut its key interest rate by 1 percentage point to 36% after five consecutive meetings without change. The decision is the first signal of renewed monetary easing, but the institution made it clear that the next steps will depend on inflation and economic developments.
The interest rate on overnight loans was reduced from 40% to 39%, and that on overnight deposits - from 35.5% to 34.5%. The move coincided with market expectations. A Reuters poll of 22 out of 24 economists had forecast a rate cut.
Inflation is falling, but more slowly than expected
Turkey's annual inflation rate fell to 29.7% in September, falling below 30% for the first time since late 2021. However, the pace of disinflation remains slower than the authorities' initial targets. The new medium-term program projects inflation at 28.4% at the end of 2026, 21% at the end of 2027 and 13.5% at the end of 2028, before reaching single digits in 2029.
The Monetary Policy Committee said that recent data and leading indicators confirm a slowdown in core inflation. At the same time, economic activity and limited pass-through of external shocks to domestic prices indicate weakening demand.
The central bank identified high energy prices, linked to ongoing geopolitical tensions, as the main risk. According to the institution, they could put additional pressure on inflation through spending, economic activity and inflation expectations.
Election period to test the course
Finance Minister Mehmet Simsek said that the government would not abandon its inflation reduction program during the election period.
„Fighting the cost of living is our top priority. We will not abandon disinflation during the election period“, Simsek said.He identified the continuation of disinflation as the most important factor for the election results and acknowledged that the process was not developing at the desired speed. The government faces the task of maintaining tight economic policy without deepening the pressure on households and businesses.
The central bank stressed that the size and timing of future changes will be determined on a meeting-by-meeting basis. It also said that if the inflation outlook deteriorates significantly and persistently, monetary policy could be tightened again. The next test for the exchange rate will be new price data and the effect of lower interest rates on demand, the currency and inflation expectations.