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Turkey has cut interest rates for a third consecutive month as a fall in annual inflation to the lowest level in almost two years bolstered policymakers’ case to bring down borrowing costs.
The central bank’s monetary policy committee on Thursday lowered the benchmark one-week repo rate by 2.5 percentage points to 42.5 per cent, in line with forecasts by economists surveyed by Bloomberg and Reuters.
The latest cut brings the total reduction to 7.5 percentage points since December, when the bank ended an 18-month period of raising or keeping rates high to slow runaway inflation driven by ultra-low interest rates favoured by President Recep Tayyip Erdoğan.
That sparked a painful cost of living crisis that has battered households, especially pensioners and the third of Turks who earn the minimum wage. But Erdoğan pivoted sharply after winning re-election in May 2023, allowing the central bank to use high interest rates to bring down inflation that peaked at 86 per cent in October 2022.
Official data released this week showed inflation in Turkey had declined to 39.1 per cent in February, the lowest level since June 2023, and the central bank said in a statement accompanying the rate cut that it saw “disinflationary” domestic demand continuing in the first quarter.
It reiterated pledges to maintain tight monetary conditions to adhere to a disinflation programme and that the policy rate would be set “on a meeting-by-meeting basis”.
“Going forward, increased co-ordination of fiscal policy will also contribute significantly to this process,” the statement also said.
However, pressure on the government to maintain popular spending programmes may increase as opinion polls showed approval for Erdoğan’s ruling party had fallen over the state of the economy, according to Wolfango Piccoli, co-president of consulting firm Teneo. “Such co-ordination is unlikely to materialise,” he said.
Another risk may arise from the disconnect between the central bank’s outlook of year-end inflation of 24 per cent with businesses’ expectation of 28 per cent, according to the bank’s latest survey.
“Inflation expectations from households and businesses exceed the central bank’s projections, posing a risk to the disinflation process,” Piccoli said.
Turkish depositors continue to save in foreign currencies to hedge against concerns that the lira could depreciate. That has helped contribute to a decline of about 3 per cent in the currency against the US dollar this year.
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