Despite an inflation rate surpassing 30%, the Turkish central bank decreases interest rates
In a surprise move, the Central Bank of Turkey unexpectedly lowered its benchmark interest rate to 43% in July 2025, marking a significant shift towards monetary easing after a period of political and economic instability.
The reduction, which was three percentage points, was prompted by a notable decline in inflation and signs of slower demand pressures. Inflation, as measured by the Turkish CPI, has cooled significantly, falling to 35% - a 43-month low - and about 8 percentage points below the new benchmark rate.
The central bank's statement noted the "disinflationary impact of demand conditions has strengthened," indicating that weaker demand is helping inflation ease. However, the statement also cautioned about risks from geopolitical developments and rising trade protectionism that could disrupt the disinflation process.
The interest rate cut represents a return to easing after the Central Bank had paused rate cuts earlier in 2025 due to political unrest and volatility in Turkey’s currency. The April rate hike was a response to those disruptions. With inflation now better controlled, the Central Bank resumed its rate-cutting path to stimulate growth amid increased economic uncertainties and global trade protectionism.
Looking ahead, expectations for future interest rate changes suggest that the Central Bank may continue to cautiously ease borrowing costs if inflation remains on a downward trend and economic conditions warrant it. However, the bank will closely monitor inflation risks and geopolitical factors. The positive real rate (nominal rate minus inflation) allows room for further easing, but uncertainty remains due to external and domestic risks.
Experts from Morgan Stanley, according to Reuters, expect the benchmark interest rate to fall to 36% by the end of the year. This reduction would significantly reduce financing costs for companies, facilitating investments, and serving as an important signal for the Turkish economy.
The Turkish economy, characterised by uncertainty and weak growth, stands to benefit from this interest rate reduction. As the Central Bank aims for a long-term inflation rate of 5%, this move is a step towards achieving that goal while stimulating growth.
This decision by the Central Bank of Turkey was reported by Handelsblatt and Reuters, underscoring its importance to the Turkish economy and global markets.
In response to a significant decline in inflation and signs of slower demand pressures, the Central Bank of Turkey reduced its benchmark interest rate to 43%, marking a return to easing in July 2025. This reduction in financing costs for companies, as predicted by experts from Morgan Stanley, could serve as an important signal for the Turkish economy, facilitating investments and potentially stimulating business growth amid increased economic uncertainties and global trade protectionism.
