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Turkey's central bank lowered its policy rate by 100 basis points to 36%, cutting for the first time in five meetings, according to a statement from the bank.

The Monetary Policy Committee, chaired by Governor Fatih Karahan, also reduced the overnight lending and borrowing rates and said the size and timing of future steps would be set meeting by meeting with a cautious approach.

First rate cut since January

The Central Bank of the Republic of Turkey (TCMB) announced that the Monetary Policy Committee (PPK), meeting under Governor Fatih Karahan, cut the one-week repo auction rate, its policy rate, by 100 basis points to 36%.

The bank last lowered rates at its January meeting, so this decision ends a run of four meetings without a change.

The overnight lending rate was reduced from 40% to 39%, and the overnight borrowing rate from 35.5% to 34.5%.

Inflation trend and demand

The committee said recent inflation readings and leading indicators confirm a decline in the underlying trend despite monthly volatility. Data on economic activity and the limited pass-through of supply shocks to domestic prices point to continued weakness in domestic demand.

At the same time, the bank said elevated energy prices resulting from ongoing geopolitical tensions continue to pose upside risks to the inflation outlook. It said the effects of geopolitical developments on that outlook are being monitored closely through the cost channel, economic activity and expectations.

Policy stance stays tight

The committee said a tight monetary policy stance will be maintained until price stability is achieved, strengthening the disinflation process through demand, exchange rate and expectations channels. Future steps on the policy rate will be determined in line with interim targets, taking into account inflation outcomes, the underlying trend and expectations.

The size and timing of those steps will be set with a cautious, meeting-by-meeting approach focused on the inflation outlook, the bank said, adding that the policy stance will be tightened if the outlook shows a significant and persistent deterioration. The committee said it remains cautious against upside risks to inflation.

If developments in credit and deposit markets diverge from expectations, the monetary transmission mechanism will be supported with additional macroprudential measures, the announcement said.

Liquidity management and next steps

The bank said liquidity conditions will continue to be monitored closely and liquidity management tools used effectively. Policy decisions will be set to provide the monetary and financial conditions needed to bring inflation to the 5% target in the medium term, and will be made in a predictable, data-driven and transparent framework.

The summary of the Monetary Policy Committee meeting is due to be published within five business days.

Key takeaways

• The TCMB cut its policy rate by 100 basis points to 36%, the first reduction in five meetings.
• The overnight lending rate fell to 39% and the overnight borrowing rate to 34.5%.
• The bank said weak domestic demand continues while high energy prices keep upside inflation risks alive.
• The policy stance will be tightened again if the inflation outlook deteriorates significantly and persistently.