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Turkey's central bank cut its key interest rate for the first time in nearly two years, pointing to sluggish consumer demand and monetary strength for a larger-than-expected cut of 250 basis points.
Policymakers cut the benchmark rate to 47.5 percent from 50 percent in the first cut 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 larger than the median estimate of a reduction of up to 48.25 percent, according to economists reported by Bloomberg.
Annual consumer price inflation fell to 47 percent in November, down from a peak of nearly 86 percent in October 2022. move to reduce prices, analysts say.
Turkey's Central Bank said it saw signs of inflation easing further in December, but noted it was not abandoning its monetary policy.
“A an. . . the status quo will be maintained until a significant reduction in monthly inflation is observed”, it said on Thursday, adding that rates will be determined on a meeting-by-meeting basis.
The bank said on Wednesday it will meet eight times in 2025 to set rates, rather than the usual 12 meetings.
“The central bank has shown that it can choose to slow down or pause in future meetings,” said Hakan Kara, a former economist at Turkey's central bank, and noted that the increase in the minimum wage, much smaller than previous increases, provided “a comfortable way” to reduce.
Erdoğan said in an interview with X late Tuesday that the minimum wage would be 22,104 liras ($627) each month, a move that was welcomed by investors as a sign of his commitment to reducing consumer demand and inflation. About a third of Turkish workers receive the minimum wage, and the annual change serves as a guide for further wage increases.
But labor groups rejected the new pay level, with the head of Türk-İş, a union with 1.75mn members, calling it “unacceptable.”
Consumer prices rose by 0.07 percent for every percent increase in Turkey's minimum wage, the central bank calculated last year. Türk-İş said that clearing the hunger threshold for a family of four now requires a monthly salary of 20,562 lira.
Erdoğan has raised wages significantly to win over voters ahead of the 2023 and 2024 elections. But recently he has resorted to pro-market policies to win back foreign investors who were deterred by years of low interest rates when the country faced deflation. . Turkey started raising prices in June 2023.
The government must now meet its pledges to cut spending and raise tax revenue to lower inflation, which the central bank predicts will reach 14 percent by the end of next year, analysts say.
“The central bank is mostly playing its role,” Kara said. “Achieving the desired inflation target will only be possible through further fiscal and institutional reforms.”