Turkey’s central bank reduces policy interest rate

(MENAFN) Turkey’s central bank has lowered its policy interest rate for the second consecutive meeting as inflation in the country continues its gradual decline.

Earlier this year, the bank had increased its main interest rate to 46 percent in April following protests linked to the imprisonment of Istanbul’s prominent opposition mayor. In July, the rate was brought down to 43 percent. On Thursday, the bank opted for another reduction, setting the rate at 40.5 percent — a sharper decrease than the two-percentage-point cut that analysts had anticipated.

Official data released last week showed annual inflation dropping further to 32.95 percent in August from 33.52 percent in July, reinforcing expectations for another rate reduction.
"While growth exceeded projections in the second quarter, final domestic demand remained weak. Recent data suggest that demand conditions remain disinflationary," a bank statement said.

The statement also noted that food and service prices were "keeping upward pressure on inflation."

"Inflation expectations, pricing behaviour, and global developments continue to pose risks to the disinflation process," it added, pledging to maintain a tight monetary policy stance "until price stability is achieved."

The bank indicated that it could reverse course and increase rates if the economic situation demands it. "If the inflation outlook significantly deviates from the interim targets, the monetary policy stance will be tightened," the statement said.

Economists analyzing the move noted that the central bank now has "a clearer focus on interim inflation targets." One senior emerging markets economist observed, "While we think monetary easing will continue.. the statement supports our view that real interest rates will remain high for a prolonged period."

He predicted that the central bank would likely continue with 250 basis point cuts for the remainder of the year, tapering to 100–200 basis points in 2026, with the policy rate ending next year at 25 percent. He added that this approach would "leave real interest rates at around 5 per cent."

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