Moody’s justified its decision Friday by citing effective economic policies that have helped restore investor confidence in the Turkish lira.

It also highlighted the central bank’s commitment to tight monetary policy that “durably eases inflationary pressures” and “reduces economic imbalances.”

Inflation continued to slow slightly last month in Turkey, reaching 35% year-on-year, according to official figures released in early July.

It had exceeded 75% in May 2024 year-on-year, before slowing month after month.

Moody’s said the government’s structural reforms – aimed at reducing energy dependence and boosting export competitiveness – could make the economy more resilient to external shocks.

But the agency warned that limited foreign exchange reserves still leave Turkey vulnerable to balance of payments shocks.

The Turkish central bank cut its key interest rate from 46% to 43% on Thursday, a slightly larger-than-expected reduction.

The institution began a series of rate cuts in December as inflation slowed, but on Thursday it predicted a temporary rebound in monthly inflation in July.

In the longer term, it expects inflation to ease to 24% by the end of this year and 12% by the end of 2026.