Turkish central bank surprises with large rate cut

• Reduction of 250 basis points
• Lending rate just above inflation
• Analysts predicted smaller cut

Turkey’s central bank has cut its key lending rate by a higher than expected 250 basis points.

The bank lowered its lending rate to 47.5 percent on December 26, down from the 50 percent it has stood at since March.

This is the first reduction in nearly two years and a sign that the bank and the government believe the country’s inflation is being brought under control.

The last time the bank cut rates was in February 2023, when it reduced the benchmark to 8.5 percent, before bringing in a series of increases to curb inflation.

Though there had been hints that the bank’s lending rate would be lowered, most analysts were tipping a more modest reduction, of between 100 and 150 basis points.

The cut leaves the lending rate just above the November consumer inflation rate of 47.09 percent.

The bank’s monetary policy committee, announcing the cut, said indicators in November pointed to a flattening of inflation, with a further decline in the underlying trend for December.

“The decisiveness regarding tight monetary stance is bringing down the underlying trend of monthly inflation and strengthening the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations,” the committee statement said.

One economist, Mustafa Sönmez, said the decision to cut rates was no surprise, as there had been pressure from the business community to ease borrowing costs. However, S¨pnmez said, he did not tbelieve commercial banks would move quickly to reduce their own rates on loans.

“This decision does not mean that borrowing rates will ease immediately or that foreign currency exchange rates will rise as some exporters want,” he told AGBI.

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While inflation inn December may come in at around two percent, January could see an inflationary spike of four percent, in part because of increases in taxes and levies due to come into force at the beginning of the year, weakening the impetus for further cuts, Sönmez said.

“So as inflation is continuing at a high level, the question will be whether they can sustain a policy of rate cuts,” he said.

The centraql bank, before announcing its decision on interest rates, issued a statement saying that the monetary policy committee would no longer meet every month, instead convening every six weeks.

Because of this change, the next decision on rates will not be taken until February and is likelyn to take into account inflation in December and January, as well as the 2024 year-end data, which is scheduled to be released at the beginning of the new year.