What is the significance of interest rate decisions?

To achieve price stability, the interest rate decision is one of the key instruments of monetary policy. Central banks increase interest rates during periods of high inflation and reduce them when inflation decreases.

After COVID and due to rising energy prices caused by the Russia-Ukraine war, the Federal Reserve (FED) and the European Central Bank (ECB) initiated a new period of rate hikes. In Türkiye, similar rate hikes were implemented by the Central Bank as inflation rose during the same period. These consecutive rate increases by central banks to ensure price stability led to reduced consumer spending and, in many cases, economic stagnation. The resulting low growth rates in several European countries are expected to have various political repercussions.

Due to economic stagnation in European economies, the ECB began cutting interest rates, even though inflation had not yet reached its target levels. This decision, driven by the economic and social costs of high interest rates in European countries, is a significant one. The rate cuts implemented by the ECB will undoubtedly serve as an important indicator for other countries, including the United States. It seems likely that the trend of synchronized rate hikes will also be seen in rate cuts. This points to the possibility of the Federal Reserve in the U.S. starting to cut rates, which many anticipate.

The Central Bank of Türkiye’s Monetary Policy Committee (MPC) is meeting this week. Will a rate cut come from this meeting? The answer to this question depends directly on a more noticeable decrease in inflation. Additionally, the interest rate set by the Central Bank will be tied to the inflation rate, the break in the inflationary trend, and the real interest rate (the difference between the inflation rate and the interest rate). On the other hand, maintaining the current momentum in economic growth will also be an important criterion for the interest rate decision.

All these factors serve as crucial indicators for rate cut decisions in Türkiye. The main question is: Will the rate cut decision come in the last quarter of this year or in the first quarter of 2025?