Turkey’s central bank cut its key policy rate by another 250 basis points on January 23, continuing the easing it began last month, citing that “the underlying trend of inflation declined in December.”

The Central Bank of the Republic of Turkey (CBRT) cut its one-week repo rate from 47.5% to 45%, it announced after its Monetary Policy Committee (MPC) meeting, in line with market consensus.

In December, the bank cut rates for the first time since February 2023.

Annual inflation in Turkey fell to 44.38% last month amid a steady decline that began in the middle of last year. Earlier, Turkey’s central bank raised interest rates by 4,150 basis points as part of a long cycle of tightening to suppress price growth and domestic demand, the main driver of inflation.

It held it at 50% for eight months before starting to ease last month.

Economists had expected the bank to deliver a 250 basis point cut this month and predicted that the easing would continue throughout the year.

Citing that the underlying trend of inflation “eased in December,” the central bank warned that leading indicators “point to an increase in January” but said this was “in line with forecasts.”

“This increase is mainly driven by service goods with time-dependent pricing and backward indexation. However, core inflation remains relatively low,” the CBRT said.

An administrative 30% increase in the minimum wage in 2025 is expected to boost monthly inflation rates this month and next, economists say.

The bank also noted that the figures for the last quarter indicate that “domestic demand is at a deflationary level.”

The process of disinflation

“Although inflation expectations and price behavior are on an upward trend, they continue to pose risks to the process of reducing inflation,” it added.

The inflation rate fell more than expected last month, ending the year almost in line with the central bank’s target and down from a peak of 75% last May.

“The determination to maintain a tight monetary stance is to strengthen the process of reducing inflation through moderating domestic demand, real appreciation of the Turkish lira, and improving inflation expectations,” the CBRT said. “In the future, strengthening fiscal policy coordination will also contribute significantly to this process,” it added..

Speaking to investors in London last week on the inflation outlook, CBRT Governor Fatih Karakhan emphasized that inflation expectations are improving and that household expectations have “also started to improve.”

In a statement on January 23, the bank reiterated that the tight monetary stance “will be maintained until price stability is achieved through a sustained decline in inflation.”

The bank aims to reduce annual inflation to 21% by the end of the year.

“Accordingly, the key policy rate will be set in such a way as to ensure the rigidity necessary for the projected trajectory of inflation reduction, taking into account realized and expected inflation and the underlying trend,” the statement said.

The bank emphasized that the committee “will make its decisions in a balanced manner at each meeting, with a focus on the inflation forecast.”

“Monetary policy instruments will be used effectively if a significant and sustained deterioration in inflation is expected,” the statement said.

Earlier this week, Marek Drimal, lead strategist for Central and Eastern Europe, Middle East and Africa (CEEMEA) at Societe Generale Corporate and Investment Banking (SGCIB), told Anadolu Agency (AA) that despite the likelihood of further rate cuts, the bank seems committed to a policy that supports real appreciation of the Turkish lira through nominal weakening.

He noted that December inflation of 44.38% created room for additional easing.

Drimal predicted a 250 basis point rate cut in January, which he hoped would be carefully communicated to avoid a sharp market reaction such as a significant depreciation of the Turkish lira.

The Turkish lira changed little throughout the day, trading at 35.65 per dollar after the decision.

The way forward

Hans-Christian Vitoska, head of CEEMEA research at Deutsche Bank, said in a speech before the committee meeting that the CBRT could sustain the pace of rate cuts seen in December in the short term.

Although the process of reducing inflation in Turkey is progressing, he warned that risks could slow the momentum.

Wietoska also expects a 250 basis point cut in January, followed by further rate cuts during the second quarter. The key policy rate could potentially reach 40% by mid-year. However, he forecasts a slower pace of cuts after April, predicting that the rate will be 32.5% at year-end, in line with the gradual decline of inflation.

Governor Karakhan is expected to deliver further remarks on inflation and the bank’s outlook during this year’s first inflation report, scheduled for February 7.

The median estimate of economists surveyed by AA for the key policy rate at the end of 2025 was 30%. This was in line with expectations in the Bloomberg HT survey, where economists also pointed to a key policy rate of 30%.

“Interest rates have fallen to 45%, the central bank has not surprised again. As former Bank of England governor Mervyn King said, ‘good monetary policy is boring,’” said Hakan Kara, a former central bank chief economist who now teaches at Bilkent University.

“Given the signs that underlying inflationary pressures are easing, we think it is more likely that policymakers will opt for another 250 basis point cut at their next meeting in March,” said William Jackson, Capital Economics’ chief emerging markets economist.

“The easing cycle is likely to slow down later this year, and the key policy rate will be around 30% at the end of the year,” he predicts.