Turkey cuts rates for first time in 22 months with jumbo reduction

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Turkey’s central bank cut its key interest rate for the first time in nearly two years, pointing to slower consumer demand and currency strength for a larger-than-expected cut of 250 basis points.

Policymakers cut the benchmark rate from 50 percent to 47.5 percent in the first cut since February 2023, when President Recep Tayyip Erdogan pushed for less borrowing to spur economic growth during his re-election campaign. The cut was larger than the median forecast of a reduction of 48.25 percent, according to economists polled by Bloomberg.

Annual consumer price inflation fell to 47 percent in November, down from a peak of around 86 percent in October 2022. The government’s decision earlier this week to raise the minimum wage by just 30 percent next year could also encourage the central bank The move to ease rates, analysts said.

Turkey’s central bank said it saw signs of inflation slowing further in December, but noted it was not abandoning its tight monetary policy.

“The . . . The position will be maintained until there is a significant decline in the underlying trend of monthly inflation”, it said on Thursday, adding that the rate will be determined on a meeting-by-meeting basis.

The bank said on Wednesday it will meet eight times to set rates in 2025 instead of the usual 12 meetings.

“The central bank has indicated that it may choose to slow down or pause in upcoming meetings,” said Hakan Kara, former chief economist at Turkey’s central bank, noting that the minimum wage increase, much lower than previous increases, provided “some respite.” for reduction.

Erdogan said in a post on X late Tuesday that the minimum wage would be a net 22,104 lira ($627) per month, a move welcomed by investors as a sign of his commitment to consumer demand and reducing inflation. About a third of Turkish workers receive the minimum wage, and the annual change serves as a guide for other pay increases.

But labor groups blasted the new pay rate, with Turk-ish, the head of a union of 1.75 million members, calling it “unacceptable”.

Consumer prices rose 0.07 percent for every percentage point increase in the Turkish minimum wage, the central bank calculated last year. Türk-İş said a monthly wage of 20,562 lira is currently needed to clear the hunger threshold for a family of four.

Erdogan dramatically increased salaries to win over voters ahead of the 2023 and 2024 elections. But he has recently shifted his focus to more market-friendly policies to lure foreign investors who have been discouraged by years of low interest rates while the country faced severe inflationary pressures. Türkiye starts raising rates in June 2023.

Analysts say the government must now meet its pledge to cut spending and raise tax revenue to curb inflation, which the central bank forecasts will reach 14 percent by the end of next year.

“The central bank is basically playing its role,” Cara said. “Achieving the desired inflation target will be possible only through further fiscal and institutional coordination.”