Turkey’s Central Bank Cuts Interest Rate by 100 Basis Points to 39.5%

Turkey’s central bank lowered its key interest rate by 100 basis points to 39.5% on Thursday, matching market expectations and extending its monetary easing cycle despite a renewed acceleration in inflation last month.

The decision underscores policymakers’ balancing act between supporting growth and containing rising prices, as the country faces intensifying political and judicial tensions that threaten investor confidence and the stability of the Turkish lira.

In a statement following the decision, the Central Bank of the Republic of Turkey (CBRT), led by Governor Fatih Karahan, said recent data suggest that demand conditions are moderating but also point to a slowing pace of disinflation.

“While indicators show that price pressures are easing in some sectors, the process of lowering inflation has slowed,” the bank said.

Inflation in Turkey accelerated for the first time in over a year in September, driven largely by higher education costs, including university tuition fees and school transport expenses, as well as increases in other service-related prices.

The rate cut marks the continuation of an easing cycle that began in July, when the central bank reduced borrowing costs by 300 basis points from 46%, following a four-month pause in its monetary loosening campaign.

Earlier in March, the CBRT had temporarily halted rate cuts amid financial market turbulence linked to political uncertainty and a judicial crackdown on Turkey’s main opposition party, the Republican People’s Party (CHP).

The latest move comes at a politically sensitive moment. In September, a surprise court ruling against the Istanbul branch of the CHP sparked concerns over the independence of Turkey’s judiciary and erased billions of dollars from the country’s main stock index.

The opposition party now faces a critical legal test on Friday, as courts are set to rule on the validity of its internal congress, a decision that could reshape Turkey’s political landscape and further unsettle domestic financial markets.

Analysts warn that renewed political volatility could trigger another round of capital flight and “dollarization”, as investors seek safety in foreign-currency assets.

The CBRT’s decision highlights the growing complexity of monetary policymaking in Turkey, where officials are under pressure to stimulate the economy while defending the lira’s stability.

Economists say that while lower interest rates could support credit growth and short-term activity, they risk undermining efforts to rein in inflation, which remains among the highest in emerging markets.

The Turkish lira has been under steady pressure throughout the year, and Thursday’s rate cut may renew downward momentum unless accompanied by stronger capital inflows or policy coordination.