Turkey cuts interest rates for first time in nearly two years

Move to bring rate down to 47.5% came amid signs of easing inflation in the country

People shop at the Mahmutpasa bazaar in Istanbul, Turkey. The central bank has been raising interest rates since mid-2023 to bring down inflation. EPA

Turkey's central bank has reduced interest rates for the first time since February last year after indications of easing consumer inflation.

The Monetary Policy Committee, led by governor Fatih Karahan, lowered its benchmark one-week repo rate to 47.5 per cent, from 50 per cent, it said in a statement on Thursday. This came after it kept the rate on hold for eight consecutive months.

It also set the central bank overnight borrowing and lending rates 150 basis points below and above the one-week repo auction rate, respectively.

"The underlying trend of inflation was essentially flat in November. Leading indicators point to a decline in the underlying trend in December. Indicators for the last quarter suggest that domestic demand, standing at disinflationary levels, continues to slow down," the committee said.

Inflation in Turkey declined to 47.09 per cent in November from an annual high of 75 per cent in May, mainly due to tight monetary and fiscal policies as the central bank raised interest rates.

The central bank has been raising interest rates since mid-2023 to bring down inflation after it abandoned President Recep Tayyip Erdogan’s unorthodox policy of keeping interest rates low to spur growth.

The latest interest rate cut is likely to support Turkey's stagnating economy, which grew 2.1 per cent in the third quarter, down 0.2 per cent quarter-on quarter on a seasonally and calendar-adjusted basis, according to the Turkish Statistical Institute.

However, the committee on Thursday said that its decision does not necessarily mean rates will continue to be lowered during future meetings.

The tight monetary stance will be maintained until a "significant and sustained decline" in the underlying trend of monthly inflation is observed and inflation expectations "converge to the projected forecast range", it said.

"The committee will make its policy decisions so as to create the monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5 per cent inflation target in the medium term," it said.

Last month, S&P Global upgraded Turkey's credit rating for the second time this year, citing the impact of the government's tight monetary stance that has helped stabilise the nation's economy. The country's long-term sovereign credit rating was raised to BB- from B+, although its outlook was revised to stable from positive.

In September, credit ratings agency Fitch also upgraded Turkey's long-term foreign-currency Issuer Default Rating to "BB-" from "B+", with a "stable outlook, citing improved fiscal policy and improved external buffers.

Fitch expects Turkey's inflation to finish 2024 at 43 per cent, resulting in average inflation of 59.5 per cent for the year, it said. The average inflation will then decline to 31 per cent in 2025 and end the year at 21 per cent, the agency said.

"Given the still high projected level of inflation, the premature easing of monetary policy or the abandonment of the current policy direction, which is not our base case, could reignite inflationary pressures and consequently macro-financial stability and balance of payments risks," Fitch said in its September report.