Türkiye's central bank slashed its key policy rate by another 250 basis points on Thursday, continuing the easing that it kicked off last month as it cited that "the underlying trend of inflation decreased in December."
The Central Bank of the Republic of Türkiye (CBRT) reduced its one-week repo rate from 47.5% to 45%, it said following its monetary policy committee (MPC) meeting, in line with market consensus.
In December, the bank cut rates for the first time since February 2023.
Annual inflation in Türkiye eased to 44.38% last month amid a steady decline that began in the middle of the last year. The Turkish central bank had earlier hiked interest rates by 4,150 basis points in a long tightening cycle aiming to suppress price increases and domestic demand, the main driver of inflation.
It kept it at 50% for eight months before beginning easing last month.
Economists were expecting the bank would deliver a 250 basis point cut this month and anticipate easing to continue throughout the year.
While citing that the underlying trend of inflation "decreased in December," the central bank warned that leading indicators "point to an increase in January" but said that was "in line with the projections."
"This increase is mainly driven by service items with time-dependent pricing and backward indexation. Core goods inflation, however, remains relatively low," the CBRT said.
A 30% administered rise in the minimum wage for 2025 is expected to boost monthly inflation readings this month and next, economists say.
The bank further said that indicators for the last quarter suggest that "domestic demand stands at disinflationary levels."
"While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process," it added.
The inflation rate last month dropped more than expected, ending the year closely in line with the central bank's target and easing from the peak of 75% in May last year.
"The decisiveness regarding the tight monetary stance is strengthening the disinflation process through moderation in domestic demand, real appreciation in Turkish lira and improvement in inflation expectations," the CBRT said Thursday. "Going forward, increased coordination of fiscal policy will also contribute significantly to this process," it added.
Delivering a presentation on the inflation outlook to the investors in London last week, CBRT Governor Fatih Karahan highlighted that inflation expectations are improving and that expectations of households "started to improve as well."
In a message on Thursday, the bank reiterated that the tight monetary stance "will be maintained until price stability is achieved via a sustained decline in inflation."
The bank aims for the annual inflation to fall to 21% by year-end.
"Accordingly, the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path taking into account realized and expected inflation and the underlying trend," it said.
The bank highlighted that the committee "will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook."
"Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen," it said.
Earlier this week, Marek Drimal, lead strategist for Central and Eastern Europe, the Middle East and Africa (CEEMEA) at Societe Generale Corporate and Investment Banking (SGCIB), told Anadolu Agency (AA) that although further rate cuts are likely, the bank appears committed to policies that support the real appreciation of the Turkish lira through nominal weakening.
He noted that the December inflation rate of 44.38% created room for additional easing.
Drimal predicted a 250 basis point rate cut in January, which he expected would be carefully communicated to avoid sharp market reactions, such as a significant depreciation of the Turkish lira.
The Turkish lira was widely unchanged during the day, trading at 35.65 against the dollar following the decision.
Hans-Christian Wietoska, head of CEEMEA research at Deutsche Bank, in remarks before the committee meeting, said that the CBRT could sustain the pace of rate cuts seen in December over the short term.
While Türkiye's disinflation process is progressing, he cautioned that risks could slow the momentum.
Wietoska also expected a 250-basis point cut in January, followed by continued rate reductions through the second quarter, with the policy rate potentially reaching 40% by mid-year. However, he forecasts a slower pace of cuts after April, projecting the rate to end the year at 32.5%, in line with a gradual disinflation process.
Governor Karahan is expected to deliver fresh remarks on inflation and the bank's projections during this year's first inflation report, scheduled for Feb. 7.
The median of economists polled by AA for the 2025 year-end policy rate was 30%. This correlated with the expectations in the poll of Bloomberg HT, where economists also pointed to a policy rate level of 30%.
"Interest rates dropped to 45%, the Central Bank did not surprise again. As former Bank of England Governor Mervin King said, 'good monetary policy is boring,'" Hakan Kara, a former central bank chief economist who now teaches at Bilkent University, said on X following the MPC decision.
"Given signs that underlying inflation pressures are easing, we think it's most likely that policymakers opt for another 250 basis point reduction at the next meeting in March," said William Jackson, chief emerging markets economist at Capital Economics.
"The easing cycle will probably slow later in the year, with the policy rate ending the year around 30%," he forecast.
