Central Bank of Turkey withdraws approximately $55 billion from market in anticipation of upcoming interest rate decision
The Turkish Central Bank has resumed its rate cuts, lowering its key policy rate by 300 basis points to 43% in July 2025. This decision comes after a period of easing inflation and stabilizing economic conditions, following a peak of 75% inflation in May 2024.
The central bank's move is a cautious, data-driven approach aimed at supporting economic growth while maintaining monetary discipline to reach inflation targets. Inflation in June 2025 stood at 35.05%, higher than expected, but the bank remains confident that disinflation will continue.
The central bank aims to maintain a tight monetary policy stance until the medium-term 5% inflation target is reached, signaling a measured easing rather than a full relaxation of policy. Despite the rate cuts, the real interest rate remains positive, which economists see as a supportive factor for continued disinflation and economic stability.
However, premature easing could potentially weaken the Turkish lira and rekindle inflation if not carefully managed. The bank is also monitoring geopolitical developments and trade protectionism closely, suggesting external risks to inflation control and currency stability remain.
The July Survey of Market Participants projects the year-end policy rate at 36.16%. The central bank has withdrawn ₺2.26 trillion ($55 billion) from the financial system on July 11 and has been consistently withdrawing liquidity since then, aiming to contain inflationary expectations and support the Turkish lira.
The rate cuts followed an earlier hike in April to 46%, a response to political tensions and currency volatility after the arrest of Istanbul’s mayor, a key opposition figure. The July cut was somewhat larger than market expectations and nearly reversed the previous April hike, signaling cautious confidence in economic recovery and inflation moderation.
Market conditions tightened due to a market rout triggered by political tensions over a corruption probe targeting then-Istanbul Mayor Ekrem Imamoglu, causing the average cost of funding to be raised as high as 49%. The Central Bank of the Republic of Turkey (CBRT) stopped withdrawing liquidity consecutively in April.
Renewed global trade tensions, sparked by U.S. President Donald Trump's announcement of a 10% baseline tariff on all countries, pose additional challenges for the Turkish economy. Persistent price rigidity in core consumer expenditure groups is hindering disinflation.
Despite these challenges, the CBRT's return to net liquidity withdrawal suggests that it is managing excess reserves cautiously without yet signaling a directional change through its funding rate. The one-week repo auction rate (policy rate) was raised to 46%, and the overnight lending rate was raised to 49%.
In summary, the Turkish Central Bank's decision to resume rate cuts is a calculated move aimed at balancing support for growth with maintaining monetary discipline to reach inflation targets. The bank's cautious, data-dependent approach aims to carefully support the Turkish lira and control inflation without causing destabilization.
- The Turkish Central Bank resumed rate cuts in July 2025, lowering the key policy rate to 43%, a move aimed at supporting economic growth while maintaining monetary discipline to reach inflation targets.
- Despite the rate cuts, the real interest rate remains positive, which economists see as a supportive factor for continued disinflation and economic stability in Turkiye.
- The central bank is monitoring geopolitical developments and trade protectionism closely, suggesting external risks to inflation control and currency stability remain.
- The recent rate cuts, followed by net liquidity withdrawal, indicate that the Central Bank of the Republic of Turkey (CBRT) is managing excess reserves cautiously without yet signaling a directional change through its funding rate.
