Market News

By Beril Akman

(Bloomberg) -- Turkey’s central bank lowered interest rates for the first time in almost two years after consumer inflation showed signs of easing and said that future easing steps would depend on price data.

The bank’s Monetary Policy Committee, led by Governor Fatih Karahan, on Thursday cut its one-week repo rate to 47.5% from 50%, after keeping it on hold for eight months in a row.

While reduction was bigger than the 175-basis-points cut predicted in a Bloomberg survey before the decision, the monetary authority narrowed the so-called rates corridor to 300 basis points from 600 points, a step that investors had said would be considered as a hawkish signal. The monetary authority also said Thursday’s decision doesn’t necessarily mean rates will continue to be lowered during future meetings.

“The Committee will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook,” the central bank said. It also highlighted a “decline in underlying trend” in inflation during the last month of the year and a slowdown in domestic demand.

The lira was little changed, trading 0.1% lower at 35.2387 per dollar as of 2:15 p.m. in Istanbul. The Borsa Istanbul 100 Index was up 1% after briefly trimming earlier advance. The yield on Turkish government bonds held on to earlier declines.

Analysts were divided over size of the expected cut in the absence of clear guidance from the central bank. Deutsche Bank AG and JPMorgan Chase & Co. penciled in a smaller reduction, while Citigroup Inc. predicted that the key rate would be lowered by 250 basis points, to 47.5%. Others including Goldman Sachs Group Inc. weren’t expecting any cuts until next year.

The central bank’s main pillars to shape policy have been inflation expectations and underlying monthly inflation trend. But seasonally-adjusted monthly inflation accelerated in November, while inflation expectations continue to remain higher than the central bank’s targets for the next 12 months.

The government announced this week that it will raise the minimum wage by 30% in 2025, a move that was in line with market expectations and which investors say will help keep demand in check.

On Wednesday, the central bank announced plans to reduce the number of rate-setting meetings next year from 12 to eight.

Turkey last lowered its benchmark rate in February 2023. That was during a period of ultra-loose policy pushed by President Recep Tayyip Erdogan. Many economists blamed the cheap credit stimulus for aggravating inflation. 

The economic leadership was reshuffled after Erdogan was reelected last year, subsequently abandoning ultra-low rates policy. A new central bank team, installed by Erdogan, has since raised rates from single digits to as high as 50%. 

--With assistance from Joel Rinneby and Tugce Ozsoy.

(Updates with central bank corridor move and MPC statement from third paragraph.)