Turkey’s Central Bank Embarks on Prolonged Interest Rate Cuts Amid Economic Challenges

Watan–The Central Bank of Turkey is preparing for a prolonged cycle of interest rate cuts this year. It is promoting its strategies by coordinating with key players in the local market. In this context, Governor Fuat Karahan is scheduled to meet with companies and non-governmental organizations (NGOs) next week, at a time when policymakers need to stimulate the economy and tame inflation.

The central bank officials will intensify their meetings with local business leaders this year, aiming to improve political communication at the outset of what is expected to be a long cycle of interest rate reductions. The plan indicates that monetary officials, along with Minister of Treasury and Finance Mehmet Şimşek, are facing criticism from some circles for focusing too much attention on foreign investors since President Recep Tayyip Erdoğan adopted a more market-friendly economic policy in mid-2023.

this move highlights how they perceive the magnitude of the challenge ahead, which involves developing an economy that entered a technical recession in the third quarter while continuing to stubbornly fight high inflation. This comes at a time when international interest in Turkish lira assets revived last year, with Şimşek and the central bank governor raising interest rates to curb rising prices. However, a wave of external rounds has led local market participants and economists to speculate that they have not received the same information.

Karahan denies these allegations, stating last November that the central bank always shares “the same things literally in those meetings, as we say here.” He has now scheduled meetings for January 17 in the Eskişehir district, located in the central part of the country, where the governor will discuss monetary policy and macroeconomic forecasts with NGOs and companies, according to sources with direct knowledge of the matter. Similar events are expected nationwide, especially in areas with strong economic activity, in the coming months.

The report suggests that ensuring policymakers’ expectations align with those of companies and households is particularly important as the central bank begins lowering borrowing costs while inflation remains high. Annual price growth slowed to 44.4% last month from 47% in November, still approaching nine times the official target, while borrowing costs were reduced for the first time in two years.

Companies and consumers expect inflation to rise over the next twelve months compared to the 21% target set by policymakers. On the other hand, investors anticipate significant interest rate cuts in all of the next eight meetings. Household behavior poses risks to inflation through demand for goods and services. The central bank acknowledged these rising risks when it lowered interest rates to 47.5% from 50% last month, adding that future cuts will not necessarily continue at the same pace.

These meetings are considered crucial for guiding Turkish authorities, as some companies have begun advocating for consecutive interest rate cuts amid slowing production. In this regard, Mustafa Gültebi, head of the Turkish Exporters Association, was quoted following last month’s rate cut as saying, “It is very important to lower rates to reasonable levels to support our weak companies.”