The Central Bank of Turkey cuts interest rates for the first time since 2023! The benchmark interest rate has been reduced to 47.5%.

After signs of significant relief in consumer inflation, the Turkish central bank cut interest rates for the first time in nearly two years and said future easing measures will depend on price data. Under the leadership of the Turkish central bank governor Sahap Kavcioglu, the Monetary Policy Committee of the central bank unexpectedly lowered the country's policy rate - the one-week repo rate - from 50% to 47.5% on Thursday after keeping policy unchanged for eight consecutive months. Although the rate cut was larger than the 175 basis points widely predicted by economists in a Bloomberg survey before the decision, the Turkish central bank significantly narrowed the so-called "interest rate corridor" from 600 basis points to 300 basis points. Domestic institutional investors in Turkey said this move would be seen by the market as a key signal of "hawkish rate cuts." The Turkish central bank also stated in its announcement that Thursday's decision did not necessarily mean that future meetings would continue cutting rates. "The Monetary Committee will make specific policy decisions based on the situation at each meeting, focusing on inflation prospects," the Turkish central bank said. The central bank also emphasized the "significant downward trend in inflation" in the last month of the year and the slowing domestic demand. As of 2:15 PM local time in Istanbul, the lira exchange rate remained largely unchanged, dropping 0.1% to 1 US dollar to 35.2387 lira. The Istanbul Borsa 100 benchmark stock index briefly fell earlier, but then rose by 1%. Turkish government bond yields continued to decline, indicating that bond assets benefiting from the rate cut were still rising. Some analysts said the rate cuts by the Federal Reserve since September, totaling 100 basis points, had given the Turkish central bank room to ease monetary policy. With no clear policy guidance from the Turkish central bank, there were huge differences among Wall Street analysts in predicting the extent of the rate cut. Deutsche Bank and JPMorgan expected a smaller rate cut, while Citigroup predicted that the key rate would be cut by at least 250 basis points to 47.5%. Other financial institutions, including Goldman Sachs, even expected no rate cuts before next year. The main basis for the Turkish central bank's monetary policy is inflation expectations and potential future monthly inflation trends. However, after seasonal adjustments, the monthly inflation rate unexpectedly rose in November, and inflation expectations for the next 12 months remain above the central bank's target level. The Turkish government announced this week that the minimum wage would be increased by 30% in 2025, in line with market expectations, with investors saying it will help control market demand. On Wednesday, the Turkish central bank announced plans to reduce the number of monetary policy meetings next year from 12 to 8. It is understood that Turkey's last rate cut was in February 2023. At that time, Turkish President Erdogan implemented an ultra-loose monetary policy. For a long time, many economists believed that Erdogan's cheap credit stimulus measures had exacerbated domestic inflation in Turkey. After Erdogan was re-elected as Turkish president last year, the country's economic leadership underwent a reorganization and abandoned the ultra-low interest rate policy. Since then, the new core team of the Turkish central bank appointed by Erdogan has raised interest rates from single-digit levels to as high as 50%.