Key Moments
- The Central Bank of the Republic of Türkiye resumed one-week repo operations, moving funding back to the 37% policy rate from the 40% overnight lending rate.
- The restart follows an effective 300bp tightening when one-week repos were suspended in early March amid US-Iran hostilities.
- Short-dated implied yields on TRY have declined, with existing lira carry trade positions likely to remain in place.
Policy Normalization and Funding Shift
ING’s Chris Turner highlights that the Central Bank of the Republic of Türkiye (CBRT) has resumed its one-week repo operations, reversing the prior reliance on the overnight lending facility. This operational change moves system funding back to the 37% policy rate instead of the 40% overnight lending rate that had been used following an earlier effective tightening of 300 basis points.
According to Turner, this marks a return to a more conventional monetary policy framework. He views the decision as an indication of increased confidence among Turkish policymakers regarding domestic financial conditions.
Background on March Suspension
The CBRT had previously suspended one-week repo operations in early March at the onset of US-Iran hostilities. At that time, the shift of funding to the higher overnight lending rate effectively amounted to a 300bp rate hike.
Market Response and Carry Trade Dynamics
The adjustment in funding operations has had an immediate impact on market pricing. Turner notes that short-term implied yields on the Turkish Lira have fallen following the announcement. Despite lower implied yields, the carry trade remains supported, as investors positioned for the lira to outperform forward levels are expected to maintain their exposure.
| Policy Element | Previous Setting | Current Setting |
|---|---|---|
| Main funding instrument | Overnight lending facility | One-week repo operations |
| Effective funding rate | 40% | 37% |
| Effective rate move in March | 300bp hike via repo suspension | |
Unchanged Quotes from ING Commentary
“In some welcome news out of Turkey, the Central Bank of Turkey announced over the weekend that it would be restarting the one-week repo operations.”
“This means that funding operations switch to the 37% policy rate and away from the 40% overnight lending rate.”
“Recall that the one-week repo operations were suspended in early March at the outbreak of US-Iran hostilities and the CBRT effectively delivered a 300bp rate hike.”
“A return to more traditional funding policy looks to be a sign of confidence from local policymakers.”
“TRY short-dated implied yields have dropped on the news and those positioned in the carry trade, expecting the lira to outperform the forwards, will likely stay invested.”
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