Turkey’s central bank signals lower effective funding rate ahead
The Central Bank of Turkey (CBT) signals a potential easing of monetary policy with an anticipated decrease in the effective funding rate from 40% to 37%, aligning more closely with market forecasts. This adjustment comes amid a revised inflation forecast raised to 28%, reflecting ongoing economic considerations and shifting dynamics within domestic demand, as noted by Governor Fatih Karahan. Per the full note source, the indications towards normalizing liquidity suggest a strategic pivot that could reshape market expectations and positioning in Turkish assets moving forward.
What the desk is arguing
The desk believes that the Central Bank of Turkey's recent comments on liquidity normalization and an effective funding rate reduction signal a critical shift in monetary policy. This move is designed to align with market expectations, particularly in light of the inflated inflation forecast now at 28%.
The CBT’s decision to potentially transition from the overnight lending facility to the one-week repo auctions, as indicated by Karahan, suggests a proactive approach to mitigate economic slowdown and manage inflationary pressures more effectively. With current effective rates at 40%, a reduction to 37% could enhance liquidity and influence market sentiment regarding Turkish lira stability.
Where it sits in our coverage
Our coverage consensus indicates a target for the USD/TRY at 1.075, with a range of 1.04 to 1.12. Analyzed firms include: - jpmorgan: 1.10 (Mar 26) - bofa: 1.04 (Mar 26)
This projection aligns with jpmorgan's slightly bullish outlook, while diverging from bofa's more conservative stance, placing our desk's perspective at the upper limit of the consensus spread.
How other firms see it
On one side, firms like jpmorgan and dbs have been increasingly optimistic about the lira's potential recovery with expected easing from the CBT. Contrarily, firms like bofa remain skeptical, advocating a more cautious view in the face of persistent inflationary pressures.
We should keep an eye on the USD/TRY pair, as its movements will reflect market sentiments regarding the CBT’s policy direction. A notable shift here could be a precursor to broader regional impacts, including those on broader EM currencies and equity markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01CBT signals a reduction in effective funding rate from 40% to 37%.
- 02Inflation forecast raised to 28%, aligning with market expectations.
- 03Potential transition from overnight lending to one-week repo auctions.
- 04Domestic demand indicators suggest a clearer economic slowdown.
Market implications
Traders should monitor the USD/TRY exchange rate as a critical barometer for sentiment regarding the Turkish lira and capital movements in the region, especially following any announcements regarding the timeline for implementing the reduced funding rate.
Risks to this view
A significant destabilizing factor could arise from any renewed tensions in geopolitical affairs or an unexpected spike in inflation, which might prompt the CBT to retain tighter monetary conditions longer than anticipated, thereby reversing the easing expectations.
Older quick take Quick take Published 12:15 Turkey Turkey’s central bank signals lower effective funding rate ahead Turkey's central bank hiked its inflation forecast to 28% from 26% previously, bringing it more in line with current market expectations. It also signalled that the effective policy stance is likely to normalise with a shift in funding from the overnight lending facility back to the repo window The Central Bank of Turkey in Istanbul Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Muhammet Mercan Chief Economist, Turkey Central Bank of Turkey Governor Fatih Karahan presented the year’s third Inflation Report on Thursday, unveiling updated projections at a time when market participants had been questioning the timing of the expected easing in liquidity conditions. In the meeting, Governor Karahan's key message was that the normalisation of liquidity conditions remains on the agenda.
This would lower the effective funding rate from 40% to 37%, although he did not indicate when such a move might take place. While we had expected this to happen in September, the case for an earlier move in August has strengthened. According to the governor, the worst of the US-Iran conflict appears to be over, and under current conditions, he does not expect any severely adverse developments.
As for the factors shaping the inflation outlook, the economic slowdown has become much clearer, particularly in domestic demand indicators. Therefore, while inflation expectations have deteriorated somewhat, the upside risks to the inflation outlook have continued to fade. Against this backdrop, the bank may consider restarting one-week repo auctions and providing funding from the policy rate.
In comparison to the previous report, the bank has kept inflation targets flat at 24%, 15%, and 9% for this year and the next two years, respectively. Still, the CBT hiked the forecast for 2026 to 28% from 26% earlier, bringing it closer to the market forecast, which stood at 29.2% in the latest survey. For next year and 2028, the forecasts are unchanged, remaining aligned with the targets.
The hike for this year reflects a combination of changing assumptions related to several key drivers: i) a slightly downward revision to external demand ii) a cut (from US$89.4 to US$87.8) in oil prices, which retreated following the ceasefire but rose again with subsequent tensions in July iii) higher import prices on the back of diesel refinery margins, natural gas and commodity prices excluding energy iv) an upward adjustment in food inflation to 28.5% from 26.3% due to recent data, and the outlook for agricultural commodity prices. In the current highly uncertain environment, the CBT sees risks stemming from: i) energy prices, on both the upside and downside; ii) food prices, which remain vulnerable to positive and negative supply shocks as well as war-related pressures on global markets; and iii) "more frequent and successive supply-side shocks", which could reinforce inflation persistence. The governor added that the Bank has not changed its 2027 forecast given ongoing geopolitical risks, which could potentially impact the 2027 outlook, and ongoing preparations for the medium-term plan (MTP), that could lead to revisions in the macro framework.
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