Lira Support Limited as CBRT Keeps Rates Elevated

Key Moments

Policy Decision and Funding Structure

Commerzbank’s Tatha Ghose noted that the Central Bank of the Republic of Türkiye kept its one-week repo rate unchanged at 37.0%, in line with unanimous expectations. The interest rate corridor was also left intact, with a lower bound of 35.5% and an upper bound of 40.0%.

However, the one-week repo rate is not currently determining market funding costs. Since the Iran shock, the CBRT has kept the weekly repo facility closed, forcing liquidity provision through the overnight lending window at 40%. As a result, the effective funding rate has been hovering around the top of the corridor, a configuration Ghose considers supportive for the Turkish Lira.

Implications for the Lira and Policy Signaling

Ghose highlighted that any move by CBRT officials to re-open the weekly repo window and shift funding away from the 40% overnight facility would effectively amount to an interest rate cut. In his view, such a step could weigh on the exchange rate.

“Hence, we think that whenever CBRT officials hint at gradually bringing back repo, that will tantamount to a rate cut – and prove problematic for the exchange rate. CBRT did not provide such a signal, or hint about timing, yesterday, which counts as positive news.”

He therefore interprets the absence of guidance on normalizing funding conditions as mildly positive for the currency, since the high effective rate remains in place.

Inflation Dynamics and Oil Price Pressures

“But, it was not entirely surprising given the renewed jump in oil prices. The statement cited rising energy prices and geopolitical uncertainty, while noting that the underlying inflation trend had softened slightly in June, but would rise again in July. This is precisely the problem.”

“June’s CPI data looked better in raw month-on-month terms, but even that still implied 1.8%m/m after seasonal adjustment. July may move back above 2%m/m, helped by administered price increases and the unwinding of the fuel tax discount.”

“So the question is: should we still look back at an outdated data-point and be encouraged by it? Or, should we ignore it? Inflation expectations have worsened again, FX reserves are not yet comfortable, and the balance of payments remains vulnerable.”

Cautious Stance and Outlook for Funding Normalization

Ghose emphasized that the combination of renewed oil price gains, higher inflation expectations, and still-fragile foreign exchange reserves justifies the CBRT’s cautious stance. These factors were cited as reasons for maintaining tight funding conditions and refraining from signaling any imminent easing.

“For now, CBRT gave no immediate signal about when effective funding could be normalised back down from 40% to 37%. And that, by itself, has to count as lira-positive, at the margin.”

In his assessment, the decision to keep effective funding near 40% without indicating a timeline for a shift back toward the 37.0% repo rate continues to lend marginal support to the Lira.