Turkish Lira: Liquidity stance key for TRY – Commerzbank

Commerzbank analyst Tatha Ghose expects the Turkish Central Bank to maintain the one-week repo rate at 37.0%, but emphasizes that monetary conditions' effectiveness relies on liquidity tools. Recent technical normalization has already eased policy and accelerated the Turkish Lira's depreciation, warning that any further easing in funding or guidance would continue to put pressure on the Lira due to persistent inflation trends.

The Central Bank of the Republic of Türkiye (CBRT) will reveal its rate decision today, with the market nearly unanimously anticipating the one-week repo rate to remain unchanged at 37.0%. However, this consensus may not be as informative as it seems, as the formal repo rate does not represent the actual interest rate. The CBRT has been focusing funding on the 40% overnight lending facility by keeping one-week repo funding largely closed since the Middle East conflict.

On August 24th, it resumed one-week repo auctions, moving the effective funding cost back towards the 37.0% rate, which can be considered technical normalization but has already resulted in monetary easing. The faster lira depreciation following this decision indicates that any further signal in the same direction, such as larger repo funding, softer liquidity management, or signals of unwinding exceptional tightening, could impact the pace of lira depreciation.

Given the current inflation trends, there is little room for further easing. Therefore, the assessment and statements made by the CBRT are more significant than the unchanged rate itself. If the CBRT suggests liquidity normalization as the start of easier financial conditions, it could prove problematic for the lira's value, as it would continue to face pressure.