Turkey’s Central Bank Cuts Interest Rate to 36% Amid Weak Demand and Inflation Risks
Key Facts
Turkey’s central bank cut its one-week repo rate from 37% to 36% on October 22, in a move the Monetary Policy Committee said came as the underlying trend in inflation continued to slow. The decision also included a cut in the overnight lending rate from 40% to 39%, and in the overnight borrowing rate from 35.5% to 34.5%. The bank said inflation data and leading indicators confirmed a slowdown in the underlying trend in prices. At the same time, it said economic activity data and the limited pass-through of supply shocks to domestic prices indicated that domestic demand remained weak. The decision places the rate-cutting path alongside the bank’s warning of ongoing inflation risks, at a time when developments in demand and prices remain central to its coming decisions.
The bank based its assessment of activity on indicators showing a slowdown in some areas of the economy, while growth remained positive in the second quarter. Gross domestic product rose 2.3% year on year and 1.1% quarter on quarter during that period, according to the bank’s summary of its September meeting. By contrast, the summary pointed to a further quarterly decline in private consumption. This is consistent with the committee’s assessment that domestic demand remains weak, despite output growth. In an earlier reading of confidence, the real sector confidence index, which measures manufacturing, rose 0.1% to 102.5 points in September, according to the Turkish Statistical Institute.
Price indicators reflect a picture of falling annual inflation alongside continued high pressures in some sectors. The bank’s summary said consumer prices rose 1.84% in August, while annual inflation fell to 31.51%, a decline of 0.24 percentage points. Annual inflation for goods was about 26% in the same month, compared with about 40% for services, according to the summary. The governor also said in August that annual consumer inflation was 31.8% in July, and that the average of six indicators the bank tracks for the three-month calculated underlying trend was about 27%. The bank had raised its end-2026 inflation forecast to 28%, expecting it to fall to 15% at the end of 2027 and 9% at the end of 2028, before stabilizing at its medium-term target of 5%.
The bank said that higher energy prices linked to geopolitical tensions continued to pose an upside risk to the inflation outlook. In its statement, it said, "High energy prices due to ongoing geopolitical tensions continue to pose upside risks to the inflation outlook." It added that tight monetary policy would remain in place until price stability was achieved, while keeping open the possibility of tightening if inflation expectations deteriorated significantly and persistently. In August, bank data showed total international reserves rising to $184.2 billion on September 4, up $21.6 billion since July 24. The bank also said Turkey’s five-year sovereign credit default swap premium fell to 220 basis points on September 9 from its level on July 22.
The lira moved only slightly after the decision was announced, with the dollar at 49.6275 lira, compared with a previous-day close of 49.6025 lira, according to data cited by Investing.com. Over the period from October 19 to 25, the dollar’s close against the lira rose from 49.47458 to 49.7616, according to EL7 market data. Both readings show that the currency was weaker against the dollar at the close at the end of that period than at its start. Ahead of the October decision, 22 economists in a poll cited by Investing.com expected a rate cut, while two expected rates to remain unchanged. The participating economists said another 100-basis-point cut at the December meeting could put the interest rate at 35% at year-end; these remain poll figures and forecasts attributed to its participants.
The bank is scheduled to publish the summary of the Monetary Policy Committee meeting on October 30, with the next meeting set for December 10, 2026. The next meeting date follows the bank’s statement reiterating its guidance that tight policy would continue until prices stabilize, with additional tightening tied to a significant and persistent deterioration in inflation expectations. Ahead of that, the Turkish Statistical Institute announced that its next labor market data release would be on October 27, 2026. These dates provide near-term milestones for tracking the bank’s assessment of the economy and prices, alongside a reading on the labor market. In August, the bank’s official forecasts put inflation at 28% at the end of 2026, then 15% at the end of 2027 and 9% at the end of 2028, with a medium-term target of 5%.