The Turkish central bank lowered its key policy rate by 250 basis points to 47.5% on Thursday in the first sign of easing after months of steady rates and a tightening pivot that began in the summer of last year.

The Central Bank of the Republic of Türkiye (CBRT) reduced its policy for the first time in nearly two years, with the last one being in February 2023, when devastating earthquakes struck the country's southeast.

The bank highly correlated with market expectations while citing a "flat" underlying trend of inflation in November and suggesting leading indicators pointed to a "decline in December."

The expectations for the cut varied, starting from a rather small cut of 100 basis points to 250 basis points, according to economists and several polls recently.

Since mid-2023, the CBRT lifted its one-week repo auction rate by 4,150 basis points to rein in elevated prices, having policy unchanged since March this year.

Apart, from lowering rates, the bank said on Thursday it also decided "to adjust the monetary policy operational framework by setting the central bank overnight borrowing and lending rates 150 basis points below and above the one-week repo auction rate, respectively."

"The underlying trend of inflation was essentially flat in November. Leading indicators point to a decline in the underlying trend in December," the CBRT said following its monetary policy committee (MPC) meeting.

"Indicators for the last quarter suggest that domestic demand, standing at disinflationary levels, continues to slow down," it added.

The annual inflation rate slowed for the sixth month in a row in November, at 47.1%, according to official data.

In a turnaround a year and a half ago, President Recep Tayyip Erdoğan appointed a new central bank leadership, that orchestrated a move to more conventional policies, which have since resulted in raising economic confidence, boosting international reserves and bolstering the country's credit ratings.

The central bank on Thursday also cited "improvement" in services inflation and suggested the committee "will make its decisions prudently on a meeting-by-meeting basis with a focus on the inflation outlook."

"While core goods inflation remains low, the improvement in services inflation has become more apparent. Unprocessed food inflation appears to have moderated in December after an elevated course in the previous two months. While inflation expectations and pricing behavior tend to improve, they continue to pose risks to the disinflation process," it said.

The rate cut, widely expected, came after the bank on Wednesday shared its strategy for next year, according to which it said would convene eight times next year for MPC meetings.

It also followed the announcement of the wage hike for the next year.

A modest increase in Türkiye's minimum wage had strengthened expectations for a rate cut, according to economists a day earlier, as it showed the government's determination to reach disinflation targets.

The central bank reiterated on Thursday its message that the "monetary policy tools will be used effectively in case a significant and persistent deterioration in inflation is foreseen."

Similarly, like last month, it said "the level of the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path, taking into account both realized and expected inflation."

"Going forward, increased coordination of fiscal policy will also contribute significantly to this process. The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and inflation expectations converge to the projected forecast range," it noted.

"In case of unanticipated developments in credit and deposit markets, the monetary transmission mechanism will be supported via additional macroprudential measures," it added.

The CBRT said the liquidity conditions "are closely monitored and assessed with respect to prospective developments." The bank also pledged that sterilization tools "will continue to be implemented effectively."

"Taking into account the lagged effects of monetary tightening, the committee will make its policy decisions so as to create the monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5% inflation target in the medium term."