Turkey’s central bank announced another 250-basis-point reduction in its key policy interest rate, bringing the rate down to 45% and indicating that further cuts are likely in the months ahead.
Alongside the rate decision, the bank revised its policy framework by removing monthly inflation readings from the set of formal decision criteria. Instead, it now emphasizes both expected and realized inflation trends when shaping policy.
Inflation remains high: consumer prices were rising at an annual rate of 44.4% in December. Financial markets, however, expect inflation to fall substantially over the coming year, with forecasts centering near 27% by the end of the year—even though that projection would still sit above the central bank’s published 21% target.
The authorities face a difficult trade-off. On one hand, easing monetary policy aims to support economic activity as Turkey navigates a technical recession. On the other, loosening policy risks keeping inflation expectations elevated, especially since private-sector expectations currently exceed official projections. Managing the credibility of the central bank’s framework and communicating a clear path for bringing inflation toward target will be essential to anchoring expectations while fostering a sustainable economic recovery.