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Turkey’s central bank cut its main interest rate by 250 basis points (bp), more than expected, for the first time in almost two years, citing slowing consumer demand and a strong currency.
Policymakers cut the benchmark interest rate from 50% to 47.5%, the first reduction since February 2023, when President Recep Tayyip Erdogan pushed to lower borrowing costs to boost economic growth during his re-election campaign. . The cut was higher than the median estimate of 48.25%, according to a survey of economists compiled by Bloomberg.
Annual consumer price inflation fell to 47% in November 2022 from a peak of nearly 86% in October. The government’s decision earlier this week to raise the minimum wage by just 30% next year may also have helped the central bank’s rise. Analysts said interest rates would be eased.
Turkey’s central bank said there were signs that inflation would slow further in December, but it did not abandon tight monetary policy.
“The… stance will remain in place until we observe a significant decline in the underlying trend of monthly inflation,” it said on Thursday, adding that interest rates would be decided on a meeting-by-meeting basis.
The central bank announced Wednesday that it will hold eight interest rate-setting meetings in 2025, instead of the usual 12.
“The central bank has indicated that it may slow down or pause in future meetings,” said Hakan Kara, former chief economist at Turkey’s central bank, adding that the minimum wage increase would be far greater than previous increases. Although it was small, it provided “a certain degree of leeway.” for reduction.
In a post on X late Tuesday, President Recep Tayyip Erdogan said the minimum wage would amount to a net 22,104 liras ($627) each month, a move that signaled his efforts to curb consumer demand and inflation. welcomed by investors. About a third of Turkish workers receive the minimum wage, and the annual change is a guide to other pay increases.
But labor groups have slammed the new wage levels, with the head of the 1.75 million-member Turk Ish trade union calling it “unacceptable.”
The central bank calculated last year that for every 1 percentage point increase in Turkey’s minimum wage, consumer prices rose by 0.07%. Prime Minister Turk-Is said that currently a family of four needs a monthly salary of 20,562 liras to meet the hunger threshold.
President Erdogan has significantly increased salaries in a bid to win over voters ahead of elections in 2023 and 2024. But at a time when the country was suffering from severe inflation, President Recep Tayyip Erdogan recently pivoted to more market-friendly policies to lure back foreign investors who had been deterred by years of low interest rates. . Turkey began raising interest rates in June 2023.
The government now needs to make good on its pledges to cut spending and raise tax revenue to bring down inflation, which the central bank predicts will reach 14% by the end of next year, analysts said.
“Central banks are primarily playing that role,” Kara said. “Achieving the desired inflation target will only be possible with further fiscal and institutional adjustments.”
