Central Bank of Turkey reduces main interest rate to 43%
Central Bank of the Republic of Türkiye Announces Continued Monetary Easing
The Central Bank of the Republic of Türkiye (CBRT) has announced a cautious easing trajectory for the country's monetary policy, with further rate cuts expected in the coming months.
On July 1st, 2025, the CBRT reduced its overnight lending rate from 49% to 46% and the overnight borrowing rate from 44.5% to 41.5%. This marks the first significant reduction in policy rates since 2021.
The CBRT is committed to further easing, with market expectations and central bank signals pointing to additional rate cuts in September, October, and December 2025. The exact magnitude of future cuts is uncertain, but they could range between 200 to 300 basis points per meeting, reducing the policy rate to somewhere between 34% and 37% by the end of 2025.
The bank will determine the step size carefully on a meeting-by-meeting basis, emphasizing a data-dependent approach focused on inflation trends, inflation expectations, and pricing behavior. Despite the easing bias, the CBRT remains vigilant about inflation risks, including potential shocks from geopolitical developments, trade protectionism, and domestic factors such as inflationary pressures from rising energy prices and tax adjustments.
The monetary policy stance will remain tight enough to support disinflation and price stability over time but will be calibrated to also moderate domestic demand and encourage a real appreciation of the Turkish lira. Coordination with fiscal policy is expected to complement the monetary easing and support the disinflation process.
The CBRT retains flexibility through an asymmetric interest rate corridor to respond swiftly to possible shocks affecting foreign exchange reserves and market stability. The central bank also pledged to maintain a tight monetary policy stance until price stability is achieved and reiterated its goal to reach the 5% inflation target in the medium term.
After the decision, the lira currency remained stable, trading at 40.48 to the dollar. In its quarterly inflation report in May, the central bank held its year-end inflation forecast steady at 24%. However, the CBRT noted that inflation expectations and pricing behavior "continue to pose risks to the disinflation process."
Leading indicators suggest a temporary rise in monthly inflation in July due to month-specific factors. Despite this, the underlying trend of inflation "remained flat in June." The CBRT stated that it would determine the "step size" of future monetary easing "prudently" and on a meeting-to-meeting basis.
The central bank is expected to continue easing in the months ahead, with the policy rate falling to 36% by the end of 2025. All monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen. The CBRT will determine the policy rate by taking into account realized and expected inflation, and its underlying trend, in a way to ensure the tightness required by the projected disinflation path.
In summary, Turkey’s monetary policy is on a cautious easing trajectory with clear signals for continued rate cuts in the near term. However, the CBRT's meeting-to-meeting stance reflects a strong commitment to carefully balancing inflation risks and economic growth, adjusting the magnitude of easing as inflation developments and external risks unfold.
In light of the continued monetary easing trajectory, businesses in Istanbul might expect a more conducive economic environment for their financial operations. The reduction in interest rates could lead to lower borrowing costs for Turkish businesses, potentially boosting investment and stimulating domestic economic growth.
Furthermore, the continued easing could attract more foreign investments into Turkey's robust business sector, contributing to the strengthening of the Turkish economy and the increase in trading activities within the finance industry.
