With Inflation Falling to 35.41%, Central Bank Faces Mounting Pressure to Cut Rates

The gap between Türkiye’s policy interest rate and annual inflation has widened to over 10 percentage points, as inflation dropped to 35.41% in May, while the Central Bank’s policy rate remains at 46%. This divergence is fueling expectations that the Monetary Policy Committee (MPC), meeting today, may finally have enough room to deliver a substantial interest rate cut—not just a symbolic one.

For the real sector, which has been suffocating under the weight of high borrowing costs, a strong rate reduction could be a much-needed lifeline.

From 8.5% to 50%: A Two-Year Interest Rate Spiral

Before the May 2023 elections, interest rates had been cut to 8.5%, while inflation hovered around 38%. However, a dramatic shift in economic policy led the Central Bank of the Republic of Türkiye (CBRT) to raise rates as high as 50%, in an effort to combat rising prices. Rather than curbing inflation, this orthodox monetary tightening coincided with inflation peaking at 75.45% in May 2024. Even after a year of austerity-driven policies, inflation has only now, in May 2025, retreated below levels seen two years ago.

MPC Previously Ignored Market Expectations

The CBRT initially began easing rates in December 2024, cutting from 50% to 47.5%, followed by further reductions down to 42.5% by March 2025. At that time, even though the gap between inflation and interest rates was only 5–6 percentage points, the MPC moved forward with cuts. But in April, citing political instability linked to street unrest allegedly fueled by opposition parties, the bank reversed course, raising the policy rate by 3.5 points to 46%. The move was widely criticized as ignoring both business sector demands and limited pressure on foreign exchange markets.

Call for Meaningful Rate Cut, Not Token Adjustment

With inflation now at 35.41%, many sectors are urging the Central Bank to act decisively. Labor-intensive industries, struggling to maintain employment levels, argue that a symbolic rate cut is no longer enough. The current tight-money stance has deepened the economic slowdown and imposed a hefty financial burden on both households and businesses.

Market analysts warn that unless the CBRT enacts a significant rate reduction, the real economy will remain stifled. A clear signal from the MPC today could determine the pace of economic recovery in the months ahead.