The Turkish central bank lowered its key policy rate by 150 basis points (bps) to 38% on Thursday, continuing an easing cycle as inflation slowed down more than expected in November.

The Monetary Policy Committee (MPC) of the Central Bank of the Republic of Türkiye (CBRT) has also lowered the bank's overnight lending rate from 42.5% to 41% and the overnight borrowing rate from 38% to 36.5%.

The committee said inflation expectations and pricing behavior are "showing signs of improvement" even as they continue to pose risks to the disinflation process.

Consumer prices rose 31.1% year-over-year in November, with a 0.87% monthly increase – both readings below expectations. The annual inflation rate is now at its lowest since late 2021.

"Following an increase in September, the underlying trend of inflation declined slightly in October and November," the central bank said.

"In November, consumer inflation was lower than expected due to a downward surprise in food prices," it added.

Leading indicators for the last quarter point out that demand conditions continue to support the disinflation process, it also said. However, it also noted that "quarterly GDP (gross domestic product) growth turned out higher than projected in the third quarter."

Türkiye's economy grew by 3.7% on an annual basis in Q3, led by expansion in the construction sector activity, while agriculture was a drag on growth.

In a Reuters Poll, the median estimate was for a 100 basis-point decrease in the main one-week repo rate, though responses were largely split, with some economists forecasting a sharper cut of 150 points or more.

Anadolu Agency (AA) survey indicated expectations for rates to be cut by 150 basis points. Overall market expectations varied between 100 and 200 basis points, with most set at 150 points.

After a policy reversal earlier this year, the rate-cutting cycle resumed in July with a 300-basis-point move, followed by cuts of 250 points and then a smaller 100 bps cut in October amid rising food prices.

The Reuters poll, conducted last week, suggested the central bank will continue easing next year, bringing its policy rate to 28% by the end of 2026.

The central bank has set its interim inflation target at 16% for end-2026. The bank projects 2026 inflation between 13% and 19%.

One decision that would likely affect both the inflation and rates path is how much the authorities decide to raise the minimum wage for next year.

A commission of government, labor and employer members will open debate on the matter in Ankara on Friday.

The CBRT said on Thursday that a 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 committee will determine the policy rate by taking into account realized and expected inflation and its underlying trend in a way to ensure the tightness required by the projected disinflation path in line with the interim targets," it said.

It also reiterated that the step size is reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook.

"Monetary policy stance will be tightened in case of a significant deviation in inflation outlook from the interim targets," it pledged.