NEWS

The Turkish Central Bank cut its benchmark interest rate by 2.5% (250 basis points) on Thursday, bringing it down to 42.5%. This marks the third consecutive rate cut, driven by better-than-expected inflation data for February, which fell to its lowest level in 20 months, reinforcing expectations of further monetary easing in the coming period.

Declining Inflation Boosts Prospects for Further Easing

Annual inflation in Turkey dropped to 39% last month, exceeding analysts' expectations and fueling speculation that the central bank will continue cutting rates to stimulate economic growth. However, price stability risks remain, as core inflation remains high, and service prices continue to hover at elevated levels.

Previously, Governor Karahan highlighted that historical index-linked factors such as rent and education pose inflationary pressure points, prompting the bank to raise its year-end inflation forecast from 21% to 24%. He emphasized that these factors lie beyond the scope of monetary policy influence.

Central Bank’s Challenge: Encouraging Lira Savings Amid Rate Cuts

The central bank faces a dual challenge: encouraging savings in lira while continuing to lower interest rates. Foreign currency deposits surged by $10 billion last month, reflecting a decline in confidence in the local currency.

On the markets, the Turkish lira has lost 3% of its value against the US dollar since the beginning of the year, making it the second-worst-performing emerging market currency after the Argentine peso. The lira is currently trading at 36.43 per dollar, while it has weakened 0.31% against the euro to 39.41 lira. Meanwhile, gold prices in lira have dropped to 3,400 lira per gram, down by 0.54%.

The Complex Path Ahead for Inflation Control

Households and businesses continue to expect higher inflation than the central bank’s forecasts, complicating efforts to stabilize prices. While producer prices have been declining at a faster pace, consumer demand remains strong, making inflation control even more challenging.

Projections indicate that annual inflation could slow to 28% by the end of 2025, but business and household expectations suggest a slower decline than anticipated by monetary authorities, adding further complexity to the central bank’s path toward sustainable economic stability.