Turkey's Central Bank Cuts Rates Again as Inflation Cools

The Turkish Central Bank has once again lowered its benchmark interest rate, this time by 2.5 percentage points to 45%, as official figures showed that inflation was easing. This decision comes after the bank cut rates by the same amount in December 2024, marking the second rate cut in as many months. The bank's Monetary Policy Committee stated that while inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process. The Committee will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook.



Annual inflation in Turkey slowed to 44.38% in December 2024 from 47.09% in the previous month, although independent economists say the real rate is much higher. Inflation surged in recent years due to a depreciation of the Turkish lira and President Recep Tayyip Erdogan's unconventional economic policies of lowering interest rates despite high inflation. However, in 2023, Erdogan appointed a new economic team, reversing the unconventional policies and initiating a series of rate hikes. Before the rate cut in December, the central bank had maintained the interest rate at 50% for several months.

The recent rate cut by the Turkish Central Bank aligns with its long-term inflation targets and signals the bank's confidence in the ongoing disinflation process. However, the bank must balance this with the risk of reigniting inflationary pressures, which could undermine the country's economic stability in the long run. The market's reaction to this rate cut is likely to be mixed, with both potential risks and opportunities for investors. While some investors may see opportunities in the Turkish market due to the potential for higher yields and capital appreciation, the risks associated with a depreciating currency and potential inflationary pressures should be carefully considered.

In conclusion, the Turkish Central Bank's decision to lower interest rates is a step towards controlling soaring inflation and promoting economic stability. However, investors should remain vigilant and assess the potential risks and opportunities before making investment decisions in the Turkish market.