Turkey's inflation rate fell more than expected last month, potentially making it easier for the central bank to cut interest rates again. The country's main statistics agency reported that prices rose by an annual 44.4% in December, compared with 47.1% in November and lower than the 45.2% median estimate in a Bloomberg survey of analysts.

Inflation Rate Declines to Lowest Level Since May 2023

The month-on-month inflation rate, which is the central bank's preferred gauge, was 1.03%, down from 2.24% in November and the lowest figure since May 2023. The average estimate in the Bloomberg survey was 1.60%. This decline in inflation rates may indicate that the country's economy is stabilizing, and the central bank may have more room to maneuver when it comes to monetary policy.

Turkish Stocks Rise, Lira Trades Down

Turkish stocks rose after the inflation data was released, with the Borsa Istanbul 100 Index gaining 0.9% as of 10:36 a.m. local time. The lira traded down 0.1% to 35.38 per dollar. This reaction from the market may be due to investors' expectations that the central bank will cut interest rates again, which could boost economic growth and stimulate demand for Turkish assets.

Central Bank's Previous Rate Cut Creates Expectations

The inflation data followed the central bank cutting rates on Dec. 26 in its first such move in almost two years. It lowered the benchmark one-week repo rate by 250 basis points, more than markets expected, even as it maintained a hawkish stance by narrowing the difference between its lending and borrowing rates. The central bank said it would remain cautious about future moves and signaled there was no guarantee it would continue to ease monetary policy at the same pace this year.

Economists Predict Further Rate Cuts

Many economists predict that the central bank will carry on reducing the main rate by 250 basis points at each of its next few Monetary Policy Committee meetings. The next one is on Jan. 23. Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul, said that Friday's data makes it even more likely for the central bank to cut rates again.

Turkey's Inflation Problem

Turkey has suffered from one of the world's highest inflation rates for years, caused in large part by President Recep Tayyip Erdogan championing ultra-loose monetary policy in a bid to boost growth. That changed in mid-2023, when the central bank, under a new leadership, started raising rates rapidly to prevent a balance-of-payments crisis and encourage the return of foreign investors who'd fled the country's bond markets.

Inflation Decline from 75% to Below 20%

The tightening helped to slow inflation from over 75% in March, and led to billions of dollars of inflows last year from fixed-income traders. However, on Saturday Erdogan said that rates would "definitely" be reduced in 2025. His comments could increase the pressure on the central bank to ease policy quickly.

Fiscal Policy Moves Support Central Bank's Aims

Recent fiscal-policy moves may support the central bank's aims. In late December, the government raised the minimum wage by 30% for this year, far less than for 2024. Seasonally-adjusted prices, also closely watched by policymakers, will be released on Monday.

Central Bank Governor Sees Inflation Decline to 21%

Central bank Governor Fatih Karahan sees annual inflation decelerating to 21% by the end of this year, though Turkish businesses and households doubt it will come down that quickly. The government predicts the rate will drop even more in that period, to 17.5%. Finance Minister Mehmet Simsek said on X that inflation should meet the government's target this year, driven by tighter fiscal policies, easing services inflation, and improved market expectations.

Conclusion

Turkey's inflation rate falling below expectations may provide a boost to the central bank's efforts to cut interest rates again. The data also highlights the country's economic challenges, including its high inflation rate, which has been a major concern for investors. As the central bank navigates these challenges, it will be closely watched by markets and policymakers alike.

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