The Turkish central bank lowered its key interest rate by 100 basis points to 37% in its first policy meeting this year on Thursday, continuing an easing cycle as inflation moderated, although cutting by less than expected.
At a policy meeting, the bank "decided to reduce the policy rate (the one-week repo auction rate) from 38% to 37%," it said in a statement. It has also lowered the overnight lending rate from 41% to 40% and the overnight borrowing rate from 36.5% to 35.5%.
Most polls predicted a slightly larger cut of 150 basis points.
"The underlying trend of inflation declined in December. While leading indicators suggest that monthly consumer inflation has firmed in January, led by food prices, the rise in the underlying trend of inflation is limited," the Central Bank of the Republic of Türkiye (CBRT) said following its Monetary Policy Committee (MPC) meeting.
"Indicators for the last quarter point to demand conditions that continue to support the disinflation process, albeit at a moderating pace," it added.
"While showing signs of improvement, inflation expectations and pricing behavior continue to pose risks to the disinflation process."
In a Reuters Poll, the median estimate was for 150 basis points, the same size cut as in December, though a couple of economists had predicted a smaller decrease in the benchmark rate given that disinflation is expected to slow in the coming months. A median in a poll by Anadolu Agency (AA) and private broadcaster Bloomberg HT also saw a 150-basis-point cut.
Consumer prices rose 30.9% year-over-year in December, with a 0.89% monthly increase, with both readings below expectations and helped by easing food prices. The annual inflation rate was at the lowest level since late 2021.
But given a series of new-year price updates and a 27% rise in the minimum wage for 2026, inflation readings beginning in January are expected to be volatile.
CBRT Governor Fatih Karahan, in a recent presentation to investors, also warned that the next two months' readings might be "noisy" but suggested that lower inertia in services would support disinflation.
After a brief policy reversal early last year, Türkiye's rate-cutting cycle resumed in July with a 300-basis-point move, followed by cuts of 250 points and then 100 in October amid rising food prices, before the last two cuts of 150 then 100 points.
The central bank has eased by 900 basis points since last summer, and by 1,300 points since 2024, when it had held rates at 50% for most of that year.
The Reuters poll conducted last week suggested the central bank will continue easing, bringing its policy rate to 28% by the end of this year.
The bank has set a 16% interim inflation target for the end of 2026, and projects a range between 13% and 19%.
On Thursday, the bank reiterated that the tight monetary policy stance, "which will be maintained until price stability is achieved, will strengthen the disinflation process through demand, exchange rate, and expectation channels. "
"The step size is reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook," it said.
"Monetary policy stance will be tightened in case of a significant deviation in inflation outlook from the interim targets."
"In case of unanticipated developments in credit and deposit markets, the monetary transmission mechanism will be supported via additional macroprudential measures," it pledged.
