Sharp Rate Cut Amid Inflation Easing
In a move that caught markets by surprise, the Central Bank of the Republic of Turkey (CBRT) reduced its one-week repo rate by 250 basis points to 47.5%. This rate cut, which surpassed economist expectations of a 150 basis point reduction, marks a pivotal shift in Turkey’s monetary policy after eight consecutive meetings. The decision comes as inflation continues its downward trend, with the annual consumer price index (CPI) falling to 47.09% in November, the lowest since June 2023. This marks the sixth consecutive month of disinflation, with inflation rising by just 2.24% month-over-month, the smallest increase in five months.
Disinflationary Trends and Economic Outlook
The CBRT has attributed the easing inflationary pressure to moderating domestic demand and an improvement in service sector prices. Core goods inflation remains subdued, and unprocessed food inflation, which had been a concern, also showed signs of improvement. While the central bank has noted that inflation risks remain, it continues to project a reduction in inflation, targeting 21% by the end of 2025 and 12% by the end of 2026, with a long-term target of 5%. This careful approach aims to ensure the sustainability of disinflationary momentum while maintaining the stability of the Turkish lira.
Global Recognition of Turkey’s Economic Stabilization
Turkey’s recent stabilization efforts have earned international recognition. In November, Standard & Poor’s upgraded Turkey’s long-term sovereign credit rating from B+ to BB-, citing improvements in monetary policy and the stabilization of the Turkish lira. The bank’s foreign reserve accumulation, coupled with the shift to being a net foreign currency buyer, was also highlighted as a positive development. These efforts have helped reduce Turkey’s current account deficit by approximately four percentage points of GDP since 2022. However, despite these positive steps, the Organisation for Economic Co-operation and Development (OECD) projects Turkey’s GDP growth to slow to 3.5% in 2024 and 2.6% in 2025 due to the impact of macroeconomic stabilization measures.
Market Reactions and Lira Performance
Despite the rate cut, the Turkish lira has remained relatively stable. The euro-lira exchange rate held steady at 36.61, with the lira strengthening by 2% against the euro since November, though it has depreciated by 12% against the euro over the course of 2024. The CBRT’s cautious stance, combined with fiscal coordination, will play a crucial role in guiding Turkey toward sustained economic stability in the coming years.
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