Turkish central bank cuts rates after 18-month tightening drive

ISTANBUL, Dec 26 (Reuters) - Turkey's central bank cut its key interest rate by 250 basis points to 47.5% on Thursday, at the top end of expectations, launching an easing cycle meant to leave behind protracted economic turmoil and a cost-of-living crisis.

The bank trimmed the one-week repo rate TRINT=ECI after an 18-month tightening effort that reversed years of unorthodox economic policies and easy money championed by President Tayyip Erdogan, who has since changed tack to back the programme.

The rate, last cut in early 2023, had been held at 50% since March. Annual inflation dipped to 47% last month in what the central bank believes is a sustained fall toward a 5% target over a few more years.

In a Reuters poll last week, 14 of 17 respondents expected the bank to cut rates by between 100 and 250 basis points. Erdogan's announcement this week that minimum wage would rise by a less-than-requested 30% in 2025 bolstered these predictions.

In a turnaround a year and a half ago, Erdogan appointed a new central bank leadership with independence not seen in years, and it aggressively tightened policy by 4,150 basis points in order to slay years of soaring prices and a crashing currency.

Annual inflation had touched 85% in 2022 and 75% earlier this year, while the lira TRYTOM=D3 has plunged 90% in seven years - from 3.8 to 35.3 to the dollar - eroding the earnings and savings of a generation of working and middle class Turks.

Erdogan's drive over this earlier period to slash borrowing costs despite rising prices hammered central bank credibility, wiped out much of its reserves, sent foreign investors fleeing and spawned costly state-backed policies to halt dollarization.

All of these have now begun reversing or recovered under the more orthodox approach, which Erdogan has backed, even as businesses and households were strained this year by slow growth, high borrowing costs and still-high prices.

(Reporting by Ezgi Erkoyun and Ece Toksabay; Writing by Jonathan Spicer; Editing by Daren Butler)

((jonathan.spicer@reuters.com;))