Bold move comes as lira stabilises and Turkey emerges from recession.

Turkey‘s central bank surprised observers on Thursday by slashing borrowing costs deeply yet again, but signalled that the current cycle of bold cuts may be coming to an end as the lira stabilises.

Policymakers slashed a key rate from 14 percent to 12 percent – more than many analysts were expecting.

In its post-meeting statement, the Monetary Policy Committee suggested its aggressive easing cycle was nearing an end as inflation levels off and as the economy emerges from recession.

Thursday’s cut brings Turkish “real” rates adjusted for inflation below the levels in most emerging markets.

“At this point, the current monetary policy stance is considered to be consistent with the projected disinflation path,” the bank said after its policy meeting.

Turkish inflation has dropped from a peak above 25 percent in last year’s painful currency crisis. But after touching single digits in recent months, it edged up to 10.6 percent in November.

Central bank Governor Murat Uysal has said policy is tailored to leave a “reasonable real rate on the underlying” inflation trend.

The bank began slashing rates in July, having raised the key rate to 24 percent in September of last year, when the economy tipped into recession.

After three consecutive quarters of contraction, Turkey’s economy grew 0.9 percent year-on-year in the third quarter, shaking off the impact of a near-30 percent slide in the lira’s value last year.

The lira was little changed on Thursday. It stood at 5.7865 against the United States dollar at 12:34 GMT, compared to 5.7850 before the policy announcement. It was more than 0.2 percent firmer on the day.

“More rate cuts are coming unless we reach a point where the market pushes back strongly,” said Piotr Matys, emerging-markets forex strategist at Rabobank.

The fourth consecutive easing comes a day after Washington moved a step closer to imposing sanctions on Turkey over its military action in Syria and its purchase of Russian-made missile defences.

If applied, sanctions could spark another bout of lira weakness, curb the country’s economic recovery, and force the central bank to contemplate rate hikes despite pressure from the government.

President Recep Tayyip Erdogan has repeatedly called for lower rates and on Monday said the policy rate, as well as inflation, will hit single digits in 2020.

Erdogan ousted the former central bank chief in July after the two apparently clashed over the pace of interest rate cuts.

Since taking the reins as central bank chief, Uysal has presided over an easing cycle that has far eclipsed expectations earlier in the year.

The bank has turned to other tools to help spur loan growth and reach the government’s aggressive five percent economic growth target for next year. Last week it said it will use required reserves “in an effective and flexible way” in 2020 as a fine-tuning tool.

So-called “base effect” distortions have pulled down inflation readings after last year’s spike in prices, muddying the picture for a country in which annual food inflation was nine percent last month but 26 percent a year earlier.

“The big question right now is what is the underlying rate of inflation,” said Kieran Curtis at Aberdeen Standard investments.

The central bank will hold monthly policy meetings next year, up from eight in 2019.

The US Federal Reserve’s shift to lower interest rates – which weakens the dollar – has helped stabilise the lira this year, clearing the way for Turkey to dramatically slash borrowing costs.

But the Fed held rates steady at its policy meeting this week, and signalled there likely won’t be a change in interest rate policy until 2021.