Central Bank cuts policy rate by 250 bps to 47.5 percent
ANKARA
The Turkish Central Bank has lowered its key interest rate by 250 basis points to 47.5 percent, delivering the first cut in nearly two years.
Most economists had expected the bank to reduce the key rate, the one-week repo auction rate, by 150 basis points.
The last cut was in February 2023.
“The Monetary Policy Committee (MPC) also decided to adjust the monetary policy operational framework by setting the overnight borrowing and lending rates 150 basis points below and above the one-week repo auction rate, respectively,” the bank said in a statement on Dec. 26.
The decisiveness regarding tight monetary stance is bringing down the underlying trend of monthly inflation and strengthening the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations, it added.
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, the bank said.
While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process, according to the bank.
“The level of the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path, taking into account both realized and expected inflation,” it noted.
A Central Bank survey showed on Dec. 26 that in December 12-month-ahead annual inflation expectations decreased by 0.1 points to 27.1 percent for market participants, by 0.2 points to 47.6 percent for the real sector and by 1.0 points to 63.1 percent for households.
The committee will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook and monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen, according to the statement released after the MPC meeting.
Monetary policy for 2025
Meanwhile, in its monetary policy document for 2025, released on Dec. 25, the bank said the one-week repo auction rate will remain the main policy instrument in 2025 and that it would hold 8 MPC meetings next year, reducing the frequency from the monthly rate-setting meetings.
The bank maintained the inflation target, set jointly with the government, at 5 percent.
The main communication tools of the monetary policy are the MPC announcements and the Inflation Report, which will be published four times a year, it added.
According to the policy document, the Central Bank plans to end the forex-protected lira deposits (KKM) scheme in 2025.
“The simplification process will continue in 2025 based on evaluations regarding the effects of the current macroprudential framework on inflation, interest rates, exchange rates, reserves, expectations, and financial conditions,” the bank also said in the policy report.
