According to Commerzbank’s Tatha Ghose, the Central Bank of the Republic of Türkiye (CBRT) kept its one-week repo rate at 37.0% and maintained the corridor at 35.5%-40.0%. With the repo window still closed, effective funding remains near 40%, which Ghose views as Lira-supportive. Renewed Oil price gains, rising inflation expectations and fragile FX reserves justify CBRT’s cautious stance.

High effective rate seen lira-positive

"Turkey’s central bank (CBRT) left its one-week repo rate at 37.0% yesterday, as unanimously expected; and also left the interest rate corridor unchanged at 35.5%-40.0%. The repo rate is still not the effective interest rate because CBT has kept the weekly repo window closed since the Iran shock, pushing funding towards the 40% overnight lending facility."

"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."

"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"So the question is: should we still look back at an outdated data-point and be encouraged by it?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."

"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."

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