Türkiye’s central bank weighs rate cut as inflation softens: analysts

People shop at a store in Ankara, Türkiye, on June 12, 2025. Expectations are mounting that Türkiye’s central bank could begin cutting interest rates sooner than anticipated, following a sharper-than-expected drop in inflation in May, economists said. (Mustafa Kaya/Handout via Xinhua)

ANKARA, June 12 (Xinhua) — Expectations are mounting that Türkiye’s central bank could begin cutting interest rates sooner than anticipated, following a sharper-than-expected drop in inflation in May, economists said.

The rate-setting monetary policy committee is set to meet on June 19, and analysts believe the groundwork may already be in place for a shift in policy.

Annual inflation slowed to 35.41 percent in May, down from 37.86 percent in April, marking the lowest reading since November 2021.

Monthly inflation also halved from 3 percent in April to 1.53 percent in May, driven by declines in food prices and a slowdown in services.

The unexpected drop in inflation has triggered debate among economists over whether monetary authorities might start easing as early as this month.

“The numbers could be considered as positive by monetary policymakers,” said Senol Babuscu, a professor of finance at Ankara’s Baskent University and a former senior banker.

“The bank has been very cautious, but with inflation easing, there could now be a window to potentially consider a rate cut in June or July,” he noted.

In April, the central bank reversed a brief easing cycle that began in December and raised its key one-week repo rate from 42.5 percent to 46 percent. Meanwhile, it increased the overnight lending and borrowing rates, signaling its determination to fight inflation amid global volatility, including pressures from U.S. tariffs.

However, the latest inflation data have led analysts to revise their projections.

Capital Economics, a London-based consultancy, said in a note last week that a rate cut by Türkiye’s Central Bank this month is now a realistic possibility.

“The larger-than-expected fall in Turkish inflation in May will increase the bank’s confidence that it can restart its easing cycle soon. While we had previously expected the cycle to resume in the third quarter, a cut in June is now not out of the question,” it said.

Some market participants, including those at Bank of America, are still betting on a July cut but concede that momentum is shifting.

“We don’t expect a policy rate cut in June,” analysts from the bank wrote last week. “However, we do see room for the central bank to adjust the upper band of the interest rate corridor. This would send a signal without fully committing to easing just yet,” the bank’s analysts pointed out.

Türkiye’s central bank expects annual inflation to decline to 24 percent at the end of this year and 12 percent by the end of 2026, following several years of grappling with persistent double-digit consumer price growth.

Atilla Yesilada, an Istanbul-based economist, said the inflation data has boosted some optimism for a rate cut.

“This is the first time in months that monetary policymakers have possibly seen a window to act. Even if they don’t cut this month, the tone of the decision could be signaling a return to monetary easing,” Yesilada pointed out.

He added that the summer months and especially autumn will be the true test of inflation dynamics for the interest rate strategy.

Rating agency Fitch’s director for banks, Ahmet Emre Kilinc, told Türkiye’s semi-official Anadolu Agency on Tuesday that it now forecasts the central bank to cut its key interest rate to 33 percent by year-end amid improvements in disinflation and the banking sector.

High inflation and the depreciation of the national currency have brought hardships for most households in Türkiye. However, with consumer prices decelerating, conditions will improve, Finance and Treasury Minister Mehmet Simsek said in an interview published on Tuesday in business-focused news outlet Dunya.

“The worst is now behind us,” the Turkish minister emphasized, adding that citizens’ purchasing power will increase gradually in 2026 in line with government forecasts.

Simsek said next year would mark a turning point, with stronger confidence and broader economic opportunities for both companies and individuals, especially for those with limited incomes. ■

People shop at a local market in Ankara, Türkiye, on June 12, 2025. Expectations are mounting that Türkiye’s central bank could begin cutting interest rates sooner than anticipated, following a sharper-than-expected drop in inflation in May, economists said. (Mustafa Kaya/Handout via Xinhua)