Turkish central bank cuts policy rate to 38%, citing improving inflation trend

The Central Bank of the Republic of Türkiye (CBRT) has implemented a measured reduction in its benchmark interest rate, citing positive developments in the country's inflation outlook. At its latest Monetary Policy Committee meeting on Thursday, the bank cut its key one-week repo rate by 150 basis points, from 39.5% to 38%. The decision matched the median forecast in a Reuters poll of economists, signaling a continuation of the bank's cautious, data-driven approach to monetary easing that began late last year.

Improved inflation data underpins the decision

In the statement accompanying the decision, the CBRT highlighted that consumer inflation in November came in lower than projected, largely due to an unexpected drop in food prices. It also noted that after an uptick in September, the underlying trend of inflation showed a slight decline in both October and November. The bank added that domestic demand conditions continue to support the disinflation process. However, it struck a note of caution, stating that "inflation expectations and pricing behavior continue to pose risks," indicating that vigilance remains necessary.

Commitment to a tight stance until price stability is achieved

Despite the rate cut, the central bank reaffirmed its commitment to a restrictive monetary policy framework. It emphasized that "the tight monetary policy stance, which will be maintained until price stability is achieved, will strengthen the disinflation process." The bank stated it would calibrate the policy rate by considering both realized and expected inflation to ensure the monetary tightness required by its projected disinflation path. The ultimate goal, as reiterated, is to create the conditions necessary to reach the medium-term inflation target of 5%.

Context of a strategic monetary tightening and easing cycle

The current easing cycle follows a period of aggressive monetary tightening. From May 2023 to March 2025, the CBRT raised its policy rate from 8.5% to 50% to combat soaring inflation. After holding steady, it began a series of cuts in late 2024. This latest reduction marks another step in a carefully managed normalization process, taking place as annual inflation has retreated to a four-year low of 31.07% as of November. For observers of the Turkish economy, the move reflects a balancing act between fostering economic growth and ensuring that the hard-won gains against inflation are not jeopardized.