Turkey Cuts Policy Rate Beyond Expectations

The Central Bank of Turkey cut its benchmark interest rate by 250 bps to 40.5% in its September meeting, more than market expectations of a softer cut to 41%. The move follows signs of slowing underlying inflation in August, though food and services prices continue to pressure inflation. Despite stronger-than-expected Q2 growth, domestic demand remains weak, keeping demand conditions disinflationary. Policymakers stressed that tight monetary policy will stay in place until price stability is achieved, working through demand, exchange rate, and expectations channels. The Committee will assess policy rate steps cautiously, guided by inflation trends and interim targets, with room to tighten if inflation deviates significantly. Decisions will aim to secure the medium-term 5% inflation target within a predictable, transparent, and data-driven framework. In the meantime, the overnight borrowing rate and the overnight cutting rate were also reduced by 250 bps to 43.5% and 39%, respectively.