Turkish bank stocks rallied following the central bank's decision to resume weekly repo funding, a move that provides cheaper financing for lenders. This decision effectively lowers borrowing costs, a significant relief for the banking sector that has faced tighter liquidity conditions. The market reacted positively, with major bank indices showing strong gains immediately after the announcement.
This policy shift comes after a period of elevated borrowing costs. In June, Central Bank Governor Fatih Karahan had indicated that weekly repo funding would not resume before the July 23 interest rate-setting meeting, citing a need to assess inflation readings first. This earlier stance had locked in higher borrowing costs for several weeks.
Prior to this, Turkish authorities had implemented measures to curb banks' access to cheaper offshore funding, aiming to deter "hot-money" flows from the lira market in London. These included urging lenders to refrain from synthetic swap transactions used to access liras cheaply overseas. The current reversal marks a significant change in the central bank's approach to liquidity management.
Analyst reactions have been mixed regarding the immediate outlook but positive for the long term. Goldman Sachs, for instance, had noted in February that while the risk-reward for Turkish bank stocks was balanced for 2026 due to already priced-in upsides, they saw significant upside potential for 2027. This was predicated on expectations of weaker inflation and falling interest rates boosting the sector. This recent move by the central bank could accelerate some of those positive trends.
Investors had previously been grappling with fluctuating expectations for interest rates. In May, bets for a rate hike rose due to higher energy costs and political pressure on the lira, with swap markets pricing in a 41.75% funding rate. However, by April, expectations for a hike had softened after a ceasefire in the Iran war eased inflation fears, causing lira swaps to signal no immediate rate increase. The current decision to restore cheaper funding provides a clear direction towards easing financial conditions for banks.
