FX.co ★ Turkey Cuts Policy Rate Beyond Expectations

In its September meeting, the Central Bank of Turkey made a significant decision to reduce its benchmark interest rate by 250 basis points, bringing it to 40.5%. This decrease surpasses market expectations, which had anticipated a more modest cut to 41%. The decision follows observations of easing underlying inflation in August, even though food and services prices continue to exert inflationary pressure. Despite stronger-than-anticipated growth in the second quarter, domestic demand remains sluggish, contributing to disinflationary demand conditions. Policymakers emphasize the continuation of a tight monetary policy until price stability is achieved, by influencing demand, exchange rates, and expectations. The Committee will approach policy rate adjustments with caution, guided by inflation trends and interim targets, allowing for further tightening if inflation veers significantly from expectations. The aim is to maintain decisions within a predictable, transparent, and data-driven framework to achieve the medium-term inflation target of 5%. Furthermore, the overnight borrowing rate and the overnight lending rate were both reduced by 250 basis points to stand at 43.5% and 39%, respectively.