Turkish Central Bank Slows Rate-Cutting Cycle with 100bp Reduction to 37% Amid Rising Food Inflation

The CBRT’s January 2026 rate decision represents a pivotal moment in Turkey’s monetary policy normalization journey, demonstrating the central bank’s delicate balancing act between sustaining disinflation progress and managing near-term inflationary risks. By reducing the benchmark rate by 100 basis points to 37%—compared to the larger 150 basis point cut implemented in December 2025—the CBRT has signaled a more cautious approach to easing, responding to emerging price pressures that threaten the broader disinflation narrative [1][2].

The decision comes against a backdrop of significant macro-economic progress. Annual inflation fell to 30.89% in December 2025, a 49-month low representing a substantial decline from the 44.4% recorded in December 2024 [1][2]. This achievement reflects the cumulative impact of the CBRT’s previous tightening cycle, which initially saw rates rise to protect the Turkish lira and restore price stability following the currency crisis of previous years. However, the slowdown in the pace of rate cuts indicates that policymakers are acutely aware of the fragile nature of this progress and the potential for inflationary pressures to resurface.

The primary driver of heightened near-term inflation concerns is food price inflation, which has intensified ahead of Ramadan and is contributing to higher monthly inflation readings. ING forecasts January 2026 monthly inflation at approximately 4.2%, up from prior expectations of around 3.5%, representing a meaningful acceleration that could complicate the disinflation trajectory [2]. This food price pressure is compounded by administrative price hikes and the re-weighting of the consumer price index, which together add to headline inflation in the near term. The convergence of these factors has prompted the CBRT to adopt a more gradual approach to monetary easing, prioritizing the preservation of hard-won disinflation gains over aggressive rate reductions.

The market reaction to the rate decision reveals significant investor skepticism regarding the outlook for Turkish monetary policy. The BIST-100 equity index, which had been trading up 0.6% ahead of the announcement, reversed course and moved lower following the decision, suggesting that market participants had priced in a more aggressive 150 basis point cut [3]. The banking sector was particularly hard hit, with the banking index declining 2.4% in immediate trading, reflecting concerns about net interest margin compression and the profitability outlook for Turkish financial institutions [3][4]. These market movements underscore the delicate balance the CBRT must maintain between supporting economic growth through gradually lower rates and preserving the monetary conditions necessary for sustained disinflation.

Looking ahead, S&P Global projects the CBRT’s policy rate could fall to a range of 27-30% by the end of 2026, implying continued but measured easing over the coming months [1]. The trajectory of future rate cuts will remain highly data-dependent, with particular attention focused on monthly inflation readings, food price developments during Ramadan, and the broader trajectory of domestic demand recovery. The CBRT’s communication suggests that future cuts will likely remain in the 100-150 basis point range, with the pace calibrated to incoming inflation data and the evolution of price pressures across different segments of the economy.

The January 2026 rate decision marks a transition from aggressive rate-cutting to a more measured approach, reflecting the CBRT’s recognition that the disinflation process remains incomplete and vulnerable to near-term shocks. The reduction from 150 basis points (December 2025) to 100 basis points (January 2026) signals a deliberate shift toward caution, with the central bank prioritizing the preservation of positive real interest rates relative to inflation expectations.

The resurgence of food-driven inflation highlights a persistent vulnerability in Turkey’s inflation profile, particularly as seasonal factors such as Ramadan amplify price pressures. Food price inflation’s outsized impact on headline metrics creates challenges for monetary policy calibration, as these pressures are partially outside the direct influence of interest rate adjustments. The CBRT’s explicit acknowledgment of food inflation concerns in its post-meeting communication suggests these dynamics will continue to shape policy decisions in the near term.

The pronounced negative reaction of the banking sector index to the rate cut decision reflects fundamental concerns about profitability in a declining rate environment. Turkish banks, which had benefited from elevated rates in the previous cycle, now face pressure on net interest margins as the monetary easing cycle progresses. This dynamic creates potential systemic risks that warrant close monitoring, particularly given the banking sector’s importance to Turkey’s financial stability.

Despite the reduction in the pace of rate cuts, Turkey continues to offer positive real interest rates of approximately 6% (37% policy rate versus ~31% inflation), maintaining attractiveness for carry trade participants. However, the smaller-than-expected cut may prompt some repositioning among investors who had anticipated more aggressive monetary easing, potentially creating short-term volatility in Turkish financial assets.

The CBRT’s communication following the January meeting reinforces its commitment to data-dependent policy formulation, with future rate decisions explicitly tied to incoming inflation prints and the assessment of price pressures across different sectors. This approach provides flexibility but also increases the importance of accurate inflation forecasting and timely data releases for market participants.

The acceleration of monthly inflation to potentially 4.2% in January 2026 poses a significant risk to the disinflation narrative [2]. If food price pressures persist beyond the near term or spill over into broader inflation measures, the CBRT may need to pause or even reverse its easing cycle, creating uncertainty for market participants and potentially triggering adverse market reactions.

The 2.3% decline in the banking index following the rate decision highlights investor concern over sector profitability [3]. Extended periods of low interest rates can compress bank margins, potentially leading to credit tightening or, in more severe scenarios, financial stability concerns. Banking sector exposure should be carefully monitored, particularly for institutions with significant interest rate sensitivity.

The gap between market expectations (150bp cut) and the actual decision (100bp cut) may generate short-term friction in market-cbk communication. While the CBRT’s cautious approach may ultimately prove prudent, misaligned expectations can create volatility and potentially undermine confidence in the monetary policy framework if such gaps persist.

Evidence of Q4 2025 domestic demand recovery suggests the Turkish economy may be regaining momentum, which, while positive for growth, could fuel inflationary pressures and complicate the disinflation process. The interplay between growth recovery and price stability will be a key dynamic to monitor in coming quarters.

The continuation of the rate-cutting cycle, albeit at a slower pace, provides ongoing support for economic activity as Turkey seeks to transition from monetary stabilization to sustainable growth. For corporate borrowers and productive sectors, the gradually declining rate environment offers improving financing conditions that could support investment and expansion.

Turkey’s maintenance of positive real interest rates at approximately 6% positions the country favorably within the emerging market complex, where many peers have seen real rates turn negative. This real rate advantage supports portfolio inflows and helps maintain dollarization at levels below the 40% long-term average [2], contributing to lira stability.

The achievement of a 49-month low in annual inflation (30.89%) represents meaningful progress that creates a foundation for eventual rate convergence toward more normal levels [1][2]. Successful navigation of current food price pressures could set the stage for a more sustainable disinflation trajectory and eventual policy rate normalization.

The CBRT’s emphasis on data-dependent policy and transparent communication creates opportunities for market participants to better anticipate policy decisions and adjust positioning accordingly. Enhanced predictability reduces uncertainty premia and supports more efficient market functioning.

The CBRT’s January 2026 rate decision to reduce the one-week repo rate to 37% reflects a cautious approach to monetary easing amid emerging inflationary pressures. The 100 basis point cut—smaller than market expectations of 150 basis points—marks a transition to a more measured pace of rate reductions following five consecutive cuts since September 2025. Annual inflation has declined significantly to 30.89%, a 49-month low, but near-term food price pressures ahead of Ramadan are contributing to elevated monthly inflation readings of approximately 4.2% [1][2]. Turkish equity markets reacted negatively to the decision, with the BIST-100 reversing earlier gains and the banking index declining 2.3%, reflecting investor concern over margin pressures and the pace of monetary easing [3][4]. The CBRT is expected to continue its gradual easing cycle toward a projected policy rate range of 27-30% by year-end 2026, with future decisions remaining data-dependent and particularly sensitive to inflation trajectory developments [1].