(Bloomberg) -- Turkey lowered interest rates for the first time in almost two years but said it would remain cautious about future cuts, with inflation only just below 50% and nearly 10 times the official target.
The central bank’s Monetary Policy Committee, led by Governor Fatih Karahan, reduced its one-week repo rate by more than markets expected — to 47.5% from 50% — on Thursday after keeping it on hold for eight meetings in a row.
The move marks the end of sharp hikes begun in mid-2023 to counter soaring inflation and help attract foreign investors back to Turkish markets. It may also provide some relief to the economy, now in a technical recession.
While the median estimate in a Bloomberg survey of analysts was for a smaller cut of 175 basis points, the MPC members halved the so-called rates corridor to 300 basis points. That’s something investors had said would be considered a hawkish signal.
In a statement, the central bank — which a day earlier reduced the number of MPC meetings to eight next year from the current 12 — said it won’t necessarily continue easing rates at the same pace. It emphasized it will “make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook.”
The MPC highlighted a “decline in the underlying trend” in inflation during the last month of the year and a slowdown in domestic demand as justification for the size of the cut.
The central bank “provided important forward guidance by tying rate decisions to macro data,” said Okan Ertem, senior economist at Turk Ekonomi Bankasi AS in Istanbul. That signals “a data-dependent approach rather than a rate-cut cycle.”
Even so, Ertem said the bank will probably lower rates by 250 basis at each meeting next year — or by 20 percentage points in total. That’s because of the latest inflation data showing a downward trend, he said.
Businesses welcomed Thursday’s decision. The president of the influential Turkish Exporters Assembly, Mustafa Gultepe, said he hopes for further easing in “parallel with the slowdown in inflation.”
The annual rate of inflation has fallen to 47.1% from more than 75% in March. The central bank aims to reduce it to 21% by the end of 2025.
Turkish stocks pared earlier gains, while the lira erased small losses, thanks to the narrowing of the rates corridor. The Borsa Istanbul Banks Index was up 0.2% as of 4:05 p.m. in Istanbul and the lira was trading little changed at 35.2 per dollar. Two-year government bonds trimmed losses to trade at 41%.
Analysts were divided over the size of the expected cut in the absence of clear guidance from the central bank. Deutsche Bank AG and JPMorgan Chase & Co. had penciled in a smaller reduction, while Citigroup Inc. correctly predicted that the key rate would be lowered by 250 basis points. Others including Goldman Sachs Group Inc. weren’t expecting any cuts until next year.
The central bank’s main focus has been inflation expectations among Turkish businesses and households, and monthly inflation.
Seasonally-adjusted monthly inflation accelerated in November, while inflation expectations remain higher than the central bank’s targets for the next 12 months. The MPC said both pricing behavior and inflation expectations “pose risks to the disinflation process.”
Still, President Recep Tayyip Erdogan’s government announced this week that it will raise the minimum wage by 30% in 2025. That was in line with market expectations and a level investors say will help keep demand in check. The move heightened expectations of a rate cut at the MPC’s final meeting of 2024.
Turkey last lowered its benchmark rate in February 2023. That was during a period of ultra-loose policy championed by Erdogan. Many economists blamed cheap credit for causing the inflation rate to soar and foreign investors to sell Turkish bonds.
Turkey’s economic leadership was reshuffled after Erdogan’s reelection in May last year and the president abandoned his ultra-low rates policy.
A new central bank team raised interest rates from single digits to 50%. The return to more orthodox monetary policy encouraged investors to return to Turkish markets and the lira has been one of the world’s best carry trades this year. A carry trade is when investors borrow in a low-yielding currency to invest in a higher-yielding one.
--With assistance from Tugce Ozsoy, Baris Balci and Joel Rinneby.
(Updates with analyst comments, details from MPC statement and market reaction.)
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