Turkey’s new central bank governor has made a responsible first move. It has reduced its key interest rate by an unprecedented three percentage points, to 43%. This marks the PMAB’s first rate cut since April. At that time, the central bank had already increased interest rates to 46% in reaction to the arrest of Istanbul mayor Ekrem Imamoglu. The recent cut in rates happens against a backdrop of continued efforts to stabilize the Turkish economy, return lira strength and combat chronic inflation.
By announcing its decision on Thursday, the country’s central bank is sending a signal of confidence that its newly restructured monetary policy committee will work. The committee’s main focus should be fighting high inflation. In June, inflation was at 35.05%, but has been consistently dropping in recent months. The last rate hike in April was meant to quell the political storm after Imamoglu’s arrest. This unrest led to the collapse of the Turkish lira.
The central bank’s recent moves are a clear sign of its long-run priorities—restoring price stability and supporting a healthy economic recovery. Since his arrest, the Turkish lira has shown surprising strength. The central bank’s continued resolve to avoid easing monetary policy until it meets its inflation goals.
“The tight monetary policy stance, which will be maintained until price stability is achieved, will support the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations.” – Turkish central bank
This strategic decision aligns with the broader economic context where the U.S. dollar’s fluctuations continue to influence the Turkish lira. Turkey’s central bank is currently sailing these very tricky waters. It is particularly related to taking steps that build consumer and investor confidence and create certainty in the economic ecosystem.
As you likely read last week, inflation is coming down. Perhaps the most telling sign that Turkey has turned an economic corner is the central bank’s unexpected July interest rate cut. The success or failure of this new approach will be watched intently by economists and financial analysts in the months ahead.