Turkish Lira: Liquidity stance key for TRY – Commerzbank

Commerzbank’s Tatha Ghose expects the Central Bank of the Republic of Türkiye (CBRT) to keep the one-week repo rate at 37.0%, but stresses that effective monetary conditions depend on liquidity tools. He notes that recent technical normalisation already eased policy and accelerated Lira depreciation, warning that any further softening in funding or guidance would keep the Lira under pressure given still-strong inflation trends.

Policy tools drive lira trajectory

"Turkey’s central bank (CBRT) will announce its rate decision later today: the market (nearly) unanimously expects the one-week repo rate to be left unchanged at 37.0%. But, as in recent months, this consensus is less informative than it appears because the formal repo rate is not the effective interest rate; other variables matter more for actual monetary conditions."

"Since the Middle East conflict, CBRT had pushed funding to the 40% overnight lending facility by keeping one-week repo funding largely closed. But on 24 August, it resumed one-week repo auctions, thereby moving the effective funding cost back towards 37.0%. This may be described as technical normalisation, but in practice it already amounted to monetary easing."

"The result immediately showed up in the form of discernibly faster lira depreciation in following days. Any further signal in the same direction – larger repo funding, softer liquidity management, or language implying that exceptional tightening is being unwound – will matter for the pace of lira depreciation."

"Underlying inflation trends do not allow room for such easing: the seasonally-adjusted CPI increase was 2.3%m/m in August, unchanged from July (we calculated it at 2.5%m/m but that difference is beside the point here). Core B and core C were running at 2.0%m/m, while services inflation remained much faster at 2.9%m/m."

"This is why the assessment and statements matter more than the unchanged rate itself. If CBRT were to portray liquidity normalisation as the beginning of easier financial conditions, the message would be problematic. The lira will continue to be under pressure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)