Turkey Cuts Interest Rates for First Time Since March as Inflation Slows

The Central Bank of Turkey lowered its key interest rate on Thursday, signaling cautious optimism as inflation shows signs of easing and financial markets regain composure after weeks of political turbulence.

The central bank’s Monetary Policy Committee (MPC) reduced the benchmark one-week repo rate to 43% from 46%, exceeding market expectations for a 250-basis-point cut. The overnight lending rate was lowered to 46% from 49%, and the overnight borrowing rate to 41.5% from 44.5%.

The rate cut marks a resumption of monetary easing, which had been on pause since March amid political unrest triggered by the arrest of Istanbul Mayor Ekrem İmamoğlu, a key opposition figure and potential challenger to President Recep Tayyip Erdoğan.

In its statement accompanying the decision, the MPC reaffirmed its commitment to a tight monetary stance “until price stability is firmly established.”

“The disinflation process will be supported by curbing domestic demand, strengthening the real value of the lira, and improving inflation expectations,” the statement said. It added that future rate decisions will be assessed on a meeting-by-meeting basis, with a continued focus on inflation outlooks.

The decision follows a sharper-than-expected slowdown in annual inflation, which declined to 35.1% in June, edging the central bank closer to its year-end target of 24%. Inflation had peaked at 75% in May 2024, making Turkey one of the world’s most inflation-prone economies at the time.

Turkish markets reacted with relative calm. The Borsa Istanbul 100 Index initially rose by 1% before paring gains to a 0.5% increase by mid-afternoon. Lira-denominated bonds trimmed earlier losses, with the 10-year yield falling to 31.24%. The Turkish lira held largely steady against the dollar.

The easing move reflects growing confidence within the central bank, under Governor Fatih Karahan, that financial volatility has cooled since the post-arrest selloff earlier this year. Following İmamoğlu’s detention, markets were rattled by protests and political uncertainty, prompting the central bank to raise rates to 46% in April in a defensive move to shore up the currency.