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Turkey’s central bank lowered its main interest rate for the first time in almost two years, pointing to slower consumer demand and the currency’s strength for a larger-than-expected cut of 250 basis points.
Policymakers lowered the benchmark rate to 47.5 per cent from 50 per cent in the first reduction since February 2023, when President Recep Tayyip Erdoğan pushed for lower borrowing costs to spur economic growth during his re-election campaign. The cut was bigger than the median forecast of a reduction to 48.25 per cent, according to economists polled by Bloomberg.
Annual consumer price inflation dipped to 47 per cent in November, down from a peak of nearly 86 per cent in October 2022. The government’s decision earlier this week to raise the minimum wage by just 30 per cent next year might have also encouraged the central bank’s move to ease rates, analysts said.
The central bank said it saw signs of inflation slowing further in December, but noted it was not abandoning its tight monetary policy.
“The . . . stance will be maintained until a significant decline in the underlying trend of monthly inflation is observed”, it said on Thursday, adding rates will be determined on a meeting-by-meeting basis.
The central bank said on Wednesday it would meet eight times in 2025 to set rates, rather than the usual 12 meetings.
“The central bank signalled that they may choose to slow or pause in the forthcoming meetings,” said Hakan Kara, former chief economist at Turkey’s central bank, and noted that the minimum wage increase, far smaller than previous rises, provided “some leeway” for the reduction.
Erdoğan said in a post on X late on Tuesday that the minimum wage would be a net 22,104 lira ($627) a month, a move welcomed by investors as a sign of his commitment to slowing consumer demand and inflation. About a third of Turkish workers earn the minimum wage, and the annual change serves as a guide for other salary increases.
But labour groups blasted the new pay rate, with the head of Türk-İş, a union with 1.75mn members, calling it “unacceptable.”
Consumer prices rose 0.07 per cent for every percentage point increase in the Turkish minimum wage, the central bank calculated last year. Türk-İş has said clearing the hunger threshold for a family of four requires a monthly wage of 20,562 lira.
Erdoğan dramatically boosted salaries to win over voters ahead of elections in 2023 and 2024. But he has recently pivoted to more market-friendly policies to lure back foreign investors who were deterred by years of low interest rates when the country was experiencing severe bouts of inflation. Turkey began raising rates in June 2023.
The government must now meet its pledges to cut spending and boost tax revenue to bring down inflation, forecast by the central bank to reach 14 per cent at the end of next year, analysts said.
“The central bank is largely playing its part,” said Kara. “Achieving the desired inflation targets will only be possible with more fiscal and institutional adjustments.”