Turkey's central bank has decided to resume weekly repo auctions at its 37% policy rate. This move is seen as a step towards normalizing funding conditions, as the bank believes the most severe economic impact of the war with Iran has subsided.
Previously, the monetary authority had suspended funding at the 37% policy rate and shifted to a higher, overnight lending rate of 40% at the beginning of March. This earlier adjustment was a "stealth rate hike" implemented in response to the economic uncertainty caused by the conflict.
Despite this resumption, market sentiment, as indicated by a Commerzbank analysis of the Central Bank of the Republic of Türkiye's (CBRT) survey, shows skepticism regarding disinflation and the stability of the Lira. Market participants are revising inflation forecasts higher, with an expectation of 29.2% for year-end 2026 (compared to CBRT's revised 28%) and 23.7% for end-2027 (compared to CBRT's 15%). Respondents also anticipate the repo rate, currently effectively at 40%, to decline to approximately 35% by year-end.
Annual inflation in Turkey eased to 31.7% in July, a three-month low, according to data released on August 3. This was slightly below economists' expectations, driven by a fall in clothing costs and below-average increases in education and recreation expenses. However, this was partially offset by a 10% jump in health costs and above-average increases in housing and transport outlays. Underlying inflation, particularly in services, remains a concern, with BBVA Research maintaining a 30% year-end inflation forecast, citing volatile energy prices and unanchored inflation expectations.
Forecasts for the Turkish Lira also reflect market caution, with respondents more optimistic than Commerzbank about the USD/TRY exchange rate for year-end (market: 51.66; Commerzbank: 53.0), but the one-year ahead forecast aligning with Commerzbank's projection of 56.0. These figures suggest limited confidence in sustained disinflation or a stable exchange rate, with analysts like those at Bank of America having raised their year-end inflation forecast to 29.5%, leaving little room for further rate cuts this year given the 37% policy rate.
