Turkish rate cut exceeds market expectations

• Central bank surprises with 150-bps move
• Market consensus was for 100 bps
• Rate cut supported by inflation data

Turkey’s central bank has surprised markets by lowering its main policy rate further than expected, citing slower inflation as supporting the deeper cut.

The bank’s policy committee announced a reduction of 150 basis points in its key lending rate on December 11, taking the one-week repo auction rate to 38 percent, down from the 39.5 percent it had set in October. Most forecasts ahead of the committee’s last meeting of 2025 had tipped a cut of 100 bps.

The decision was helped by continued easing in the consumer-price index, with annual inflation falling to 31.07 percent in November, from 32.87 percent the month before. 

With the exception of September, which logged a modest increase due to rising food costs, inflation has fallen steadily since May 2024, when it peaked at 75 percent. The central bank began rolling out a series of cuts starting in December last year, reducing its key policy rate from a high of 50 percent. 

Bank governor Fatih Karahan said lower-than-forecast inflation data in November, underpinned by a surprise drop in food-cost increases, had allowed for the latest rate reduction, but added that caution would persist heading into the new year.

“While showing signs of improvement, inflation expectations and pricing behaviour continue to pose risks to the disinflation process,” he said. “The tight monetary policy stance will be maintained until price stability is achieved.”

• Turkish GDP is rising despite the headwinds blowing
• Turkey shrugs off inflation concern to cut rates again
• Turkish consumers less pessimistic on economy

Though the cut exceeded expectations, economist Mustafa Sönmez told AGBI the reduction still left interest rates at an appealing level for overseas investors.

“In order to attract hot foreign money, you need rates 6 percent above inflation,” he said.

Anything more than a 150-bps cut would have undermined foreign investor confidence in the authorities’ commitment to fiscal prudence, Sönmez said.