Turkey’s central bank cuts rates for first time since Iran war began

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Turkey’s central bank cuts rates

Highlights

Turkey cuts its benchmark interest rate to 36%.
Annual inflation slows to a five-year low.
Fund turmoil adds pressure for further rate cuts.

According to Bloomberg, the Monetary Policy Committee, led by Governor Fatih Karahan, reduced the one-week repo rate by 100 basis points to 36%, matching most economists' forecasts. The central bank also lowered its overnight lending rate to 39% and its overnight borrowing rate to 34.5%, while emphasizing that future decisions would depend on inflation developments.

Slowing inflation opens room for easing

Annual consumer inflation declined to 29.7% in September, its lowest level since November 2021. Weaker consumer spending and slower economic activity have reinforced expectations that price pressures could continue moderating, giving policymakers greater flexibility after months of restrictive monetary conditions.

The decision marks a shift from the emergency measures introduced following the outbreak of the Iran war in February. Turkey had suspended weekly repo auctions and relied on more expensive overnight funding, effectively tightening financial conditions without formally raising its benchmark rate. Persistent energy-related inflation risks remain a concern.

Investment fund crisis adds pressure

A separate crisis in Turkey's investment fund industry has increased pressure on financial markets and household finances. Regulators ordered 131 funds holding approximately $20 billion into liquidation after several funds failed to meet redemption requests, leaving hundreds of thousands of investors waiting for repayments.

Treasury and Finance Minister Mehmet Simsek said fewer than 50,000 of nearly 500,000 affected investors had received payments totaling 40.8 billion liras, equivalent to approximately $822 million. The central bank has responded by increasing repo funding and relaxing selected credit-growth restrictions for smaller businesses.

The banking stock index declined 1.8% following Thursday's announcement, while the lira remained broadly stable at 49.63 per U.S. dollar. The market reaction suggested investors remained cautious despite the reduction in borrowing costs.

December decision tests policy flexibility

Economists at Nomura and Is Asset Management see scope for another 100-basis-point reduction at the December 10 meeting. However, that outlook depends on inflation continuing to ease and financial conditions stabilizing.

The latest decision offers some relief to borrowers and businesses while preserving relatively high-interest rates to contain inflation. Further easing could support economic activity and help absorb the consequences of the fund crisis, but policymakers must balance those benefits against currency stability and the inflationary effects of regional conflict. The next decision will test whether Turkey can sustain its gradual shift toward lower borrowing costs.

We also reported Turkey targets fund executives with new investor protection bill.

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