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Turkey’s central bank has decreased its main interest rate for the first time in nearly two years. The decision to cut rates by 250 basis points was driven by sluggish consumer demand and the strength of the currency, leading to a larger-than-expected reduction.
The benchmark rate was lowered from 50 per cent to 47.5 per cent, marking the first reduction since February 2023 when President Recep Tayyip Erdoğan advocated for lower borrowing costs to stimulate economic growth during his re-election campaign. The rate cut exceeded economists’ median forecast of a reduction to 48.25 per cent, as per a Bloomberg poll.
In November, annual consumer price inflation dropped to 47 per cent from a peak of nearly 86 per cent in October 2022. The government’s recent decision to increase the minimum wage by only 30 per cent for the upcoming year may have influenced the central bank’s move to ease rates.
While the central bank anticipates further deceleration in inflation for December, it emphasized its commitment to maintaining a tight monetary policy. Rates will be determined on a meeting-by-meeting basis, with the central bank scheduling eight rate-setting meetings in 2025, a departure from the usual 12 meetings.
Hakan Kara, former chief economist at Turkey’s central bank, noted that the minimum wage hike provided some flexibility for the rate cut, signaling a potential slowdown or pause in future meetings. Erdoğan’s announcement of a net monthly minimum wage of 22,104 lira ($627) was viewed positively by investors.
Despite the positive reception from investors, labor unions criticized the new minimum wage, with Türk-İş denouncing it as “unacceptable.” The central bank’s calculations indicate that consumer prices increase by 0.07 per cent for every percentage point rise in the minimum wage.
Erdoğan’s shift towards market-friendly policies aims to attract foreign investors and address inflation concerns. The government’s focus is now on fulfilling promises to reduce spending and enhance tax revenue to combat inflation, projected to reach 14 per cent by the end of next year.
Kara emphasized the need for fiscal and institutional adjustments to achieve the desired inflation targets, highlighting the central bank’s role in the process.