Turkey’s Central Bank Delivers Surprise Rate Cut

Turkey’s Central Bank (TCMB) delivered a surprise move at its latest Monetary Policy Committee (MPC) meeting, cutting the policy interest rate by 100 basis points, defying market expectations of a larger reduction. The decision marked a cautious but notable step in the ongoing normalization of monetary policy amid a fragile disinflation process.

Prior to the meeting, expectations leaned toward a steeper cut. A ForInvest News survey of 20 economists had pointed to a 150-basis-point rate reduction as the most likely outcome. Instead, the Central Bank opted for a more measured adjustment, signaling a preference for gradualism as inflation risks remain elevated.

Policy Rate Cut Below Expectations

Following the MPC meeting, the TCMB announced that the one-week repo auction rate, which serves as the main policy rate, was lowered from 38% to 37%.

In addition to the policy rate cut, the Central Bank also adjusted its interest rate corridor:

• The overnight lending rate was reduced from 41% to 40%

• The overnight borrowing rate was cut from 36.5% to 35.5%

These coordinated moves suggest an effort to align short-term funding conditions more closely with the revised policy stance, while preserving tight overall monetary conditions.

Inflation Trend Shows Mixed Signals

In its official statement, the TCMB emphasized that the underlying trend of inflation weakened in December, offering some reassurance that the disinflation process remains intact. However, early indicators for January point to renewed upward pressure in monthly consumer inflation, largely driven by food prices.

The Central Bank noted that while the rise in underlying inflation appears limited, it nevertheless warrants close monitoring. Data from the final quarter of the year indicate that demand conditions continue to support disinflation, although this support has weakened somewhat compared to earlier periods.

At the same time, the Bank acknowledged that inflation expectations and pricing behavior, despite showing signs of improvement, continue to pose a risk to the sustainability of the disinflation process.

Commitment to Tight Monetary Policy Maintained

Despite the rate cut, the TCMB reiterated its firm commitment to maintaining a tight monetary policy stance until price stability is fully achieved. According to the statement, tight financial conditions will continue to reinforce disinflation through demand, exchange rate, and expectations channels.

The MPC stressed that future interest rate decisions will be guided by:

• Actual inflation outcomes

• The underlying inflation trend

• Inflation expectations

All policy actions will remain aligned with the Central Bank’s interim targets, ensuring that the degree of monetary tightness required by the disinflation path is preserved.

Data-Driven and Cautious Approach Going Forward

The Central Bank underlined that the size and timing of future policy steps will be assessed on a meeting-by-meeting basis, using a cautious and inflation-focused framework. It warned that if inflation deviates significantly from interim targets, the monetary policy stance will be tightened again without hesitation.

Macroprudential Tools and Liquidity Management

The TCMB also highlighted its readiness to deploy additional macroprudential measures if unexpected developments arise in credit or deposit markets. Maintaining the effectiveness of the monetary transmission mechanism remains a key priority.

Liquidity conditions will continue to be closely monitored, and the Central Bank pledged to use its liquidity management tools actively and effectively to ensure orderly market functioning.

Long-Term Inflation Target Reaffirmed

Reaffirming its strategic direction, the MPC stated that all policy decisions will be designed to create the monetary and financial conditions necessary to bring inflation down to 5% in the medium term.

The Central Bank emphasized that its decision-making process will remain:

• Predictable

• Data-driven

• Transparent

In line with this commitment, the summary of the MPC meeting will be published within five business days, offering further insight into the rationale behind the decision.

Market Interpretation: Caution Over Aggression

The smaller-than-expected rate cut suggests that the TCMB is balancing two competing priorities: supporting the disinflation process while avoiding excessive tightening that could further strain economic activity. Analysts note that the decision reflects a measured shift, rather than a full pivot toward monetary easing.

While markets may have anticipated a more aggressive move, the Central Bank’s messaging makes clear that inflation risks remain the dominant concern, and that policy flexibility will be preserved in the months ahead.