Turkey’s Central Bank Cuts Rates – Lira Outlook Improves With Inflation

The Central Bank of the Republic of Turkey (CBRT) surprised markets with a significant reduction in its benchmark one-week repo rate, cutting it by 250 basis points to 47.5%. This decision follows a decline in the country's inflation rates and reflects the bank's ongoing efforts to stimulate economic growth while maintaining price stability.

The Turkish Lira has strengthened off the news, with the GBP/TRY pair showing some stability in recent months after a difficult year for the currency.

In November, Turkey's annual consumer price index (CPI) decreased to 47.09%, marking the lowest level since June 2023. This is the sixth consecutive month of disinflation, with inflation falling from 48.58% in October. Additionally, on a monthly basis, inflation rose by only 2.24%, the smallest increase observed in five months.

A key factor in these developments is the CBRT's acknowledgment of a declining underlying trend in inflation, particularly in December. The central bank highlighted that domestic demand is continuing to moderate, which contributes to the easing inflationary pressures. Furthermore, core goods inflation remains subdued, and there is an observed easing in unprocessed food inflation.

The CBRT maintains a tight monetary policy stance to support disinflation by moderating domestic demand and promoting the real appreciation of the Turkish lira. The bank's medium-term inflation target is set at 5%, with a tolerance band of 2%. The CBRT has projected that inflation will decrease to 21% by the end of 2025 and further decline to 12% by the end of 2026.

Supporting these economic efforts, Standard & Poor's upgraded Turkey's long-term sovereign credit rating from B+ to BB- in November, citing improvements in monetary policy. Additionally, Turkey's current account deficit has narrowed significantly, reducing by about four percentage points of GDP since 2022.

Looking ahead, the OECD forecasts Turkey's GDP growth to slow to 3.5% in 2024 and 2.6% in 2025. Meanwhile, the Turkish lira's exchange rate with the euro has remained relatively stable at 36.61, even though it has weakened by 12% against the euro over the course of 2024.