Turkey's central bank lowers key interest rate as inflation slows

ANKARA, Turkey (AP) — Turkey’s central bank lowered its key interest rate by a further 2.5 percentage points on Thursday, days after official figures indicated a slowdown in inflation that has eroded households’ purchasing power.

The bank’s Monetary Policy Committee said it was reducing its benchmark one-week repo rate from 45% to 42.5%.

It was the bank's third rate cut in a row and came after official data indicated that annual inflation has dipped to below 40% for the first time in nearly two years.

In a statement released after the committee meeting, the bank said, however, it would review inflation trends and adjust rates cautiously in upcoming policy meetings.

“While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process,” the bank said. “Monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen.”

Annual inflation in Turkey slowed to 39.05% in February from 42.12% in the previous month, according to the Turkish Statistical Institute. However, a group of independent economists have raised concerns about the official inflation figures and estimate the rate to be significantly higher.

High inflation in Turkey has been attributed to a combination of factors, including rising energy prices, the economic fallout from the COVID-19 pandemic, and President Recep Tayyip Erdogan’s past unconventional economic policy of lowering interest rates despite soaring inflation.

Erdogan has long argued that high interest rates cause inflation — a theory that runs against mainstream economic theory.

In 2023, President Erdogan appointed a new economic team, signaling a shift away from his previous unorthodox policies. The team initially implemented a series of interest rate hikes to combat inflation. After maintaining the interest rate at 50% for several months, the bank has now embarked on a gradual cycle of rate cuts.