Turkey Cuts Key Interest Rate for First Time in Nearly Two Years

Turkey's central bank has cut its key interest rate by 2.5 percentage points to 47.5%, marking the first rate reduction in nearly two years, as reported by Nikkei Asia. The move comes as the bank attempts to tackle persistently high inflation.

The bank's Monetary Policy Committee cited slowing inflation as the primary driver for the rate cut. In a statement, the committee noted that overall inflation was "flat" in November and that indicators suggest a further decline in December. The bank attributes this moderation to slowing domestic demand.

Inflation in Turkey has soared in recent years, fueled by declining foreign reserves and President Recep Tayyip Erdogan's unconventional economic policies. For a period, Erdogan pursued a strategy of lowering interest rates to combat inflation, a policy that most economists widely regarded as inappropriate. This approach ultimately led to the firing of several central bank governors who resisted his demands.

Following a shift to more conventional economic policies under a new economic team, the central bank embarked on an aggressive rate-hiking campaign, raising rates from 8.5% to 50% between May 2023 and March 2024. Rates had remained steady at 50% until Thursday's cut.

Despite this move, inflation remains a significant challenge for Turkish households, with many struggling to afford basic necessities such as food and housing. While the official inflation rate stood at 47% in November, independent economists believe the true inflation rate is considerably higher.

This latest development signals a shift in Turkey's economic strategy, moving away from Erdogan's unorthodox approach and toward more conventional methods of managing inflation.