By Daren Butler and Ece Toksabay
ISTANBUL (Reuters) -Turkey’s central bank cut interest rates by 300 basis points to 43% on Thursday, more than expected, resuming an easing cycle that had been disrupted by political turmoil earlier this year, as markets have since calmed and disinflation continued.
Going forward, the central bank said it would determine the “step size” of future monetary easing “prudently” and on a meeting-to-meeting basis. It also lowered the upper band of its rate corridor to 46% from 49%.
The lira currency remained stable after the decision at 40.48 to the dollar.
All but one of 17 economists in a Reuters poll forecast it would cut its benchmark one-week repo rate, with predictions ranging from 42.50% to 44.50% among those expecting a cut.
The bank hiked the policy rate to 46% from 42.5% in April, reversing an easing cycle that had begun in December, following market volatility over the arrest in March of Istanbul Mayor Ekrem Imamoglu, who is President Tayyip Erdogan’s main rival.
The bank said the underlying inflation trend remained flat in June and it anticipated a “temporary rise” in monthly inflation this month due to one-off factors.
“Recent data indicate that the disinflationary impact of demand conditions has strengthened,” the policy committee said.
It will set policy “taking into account realized and expected inflation, and its underlying trend in a way to ensure the tightness required by the projected disinflation path,” it added.
“The step size will be reviewed prudently on a meeting-by-meeting basis with a focus on the inflation outlook”.
Commenting on this, Kieran Curtis, head of EM local currency debt at fund manager Aberdeen, said “It doesn’t look like they will automatically do 300 bps next time.”
RISKS REMAIN
Annual inflation dipped to 35.05% in June, having fallen consistently from a peak of 75% in May last year. The bank’s latest survey of market participants’ expectations showed inflation was seen at 29.66% at end-2025.
Most economists expect easing to continue in the months ahead, with the policy rate falling to 36% by the end of 2025, according to the Reuters poll.
The tightening in recent months boosted investor confidence, with foreign holdings of lira-denominated bonds up to about 7% from near 5% after the mayor was arrested and jailed.
Political risks remain on investors’ radar. The lira and bonds weakened this month after the detention of opposition mayors in Adana, Adiyaman and Antalya in a corruption probe.
Prosecutors say the arrests are anti-graft measures, but many see them as politically motivated moves against the opposition party CHP in a crackdown that has seen more than 500 detained in just nine months.
“To establish economic confidence we need to see political tensions fading, and that has not yet happened,” said Selva Demiralp, professor of economics at Koc University.
“It remains the biggest risk and complicates the central bank’s plan to move forward,” she said, noting a Koc survey in July that shows opposition voters have far higher inflation expectations than those of Erdogan voters.
(Reporting by Ezgi Erkoyun, Ece Toksabay, Tuvan Gumrukcu; Writing by Daren Butler; Editing by Jonathan Spicer and Chizu Nomiyama )
