Turkey's central bank is preparing to resume weekly repo auctions at the policy rate of 37% to bring funding conditions in the financial system back to normal, after assessing that the most severe economic impact from the war in Iran may have passed. Previously, the central bank suspended funding at the 37% policy rate from early March and switched to a higher overnight lending rate of 40%, effectively a stealth rate hike, to cope with uncertainty after the war erupted in Iran. However, in a statement released on Sunday evening, the central bank did not say when it would resume weekly repo auctions. Fatih Karahan, the central bank governor, said during the presentation of the quarterly inflation report earlier this month that resuming weekly repo auctions was on the central bank's agenda, with the goal of normalizing liquidity conditions rather than signaling monetary easing. Karahan also said at the time that he believed the worst impact of the war had passed. Tugberk Citilci, research director at Fiba Yatirim in Istanbul, said the decision appears to reflect that the central bank has ruled out the possibility of Brent crude oil prices climbing back above $100 per barrel. However, the timing of the central bank's move surprised the market. Turkey is highly dependent on oil and natural gas imports, making its economy highly vulnerable to the surge in global energy prices caused by the war. Volatile energy and food prices have added to domestic inflationary pressures. As a result, the central bank raised its year-end inflation forecast in August to 28% from 26%, bringing it closer to market expectations, while Turkey's annual inflation rate stood at 31.8% in July. The return to weekly repo auctions at the 37% policy rate is therefore seen as an important step in bringing the central bank's funding mechanism back to normal after it had to use a higher overnight rate to cope with war-driven volatility. However, the central bank stressed that the move should not be interpreted as the start of monetary easing amid still-high inflation.
Return to 37% policy rate from 40% effective rate may lower yields, but inflation remains high; direction ambiguous.
Turkey's central bank resuming repo auctions at 37% policy rate signals normalization, potentially reducing need for higher rates, but ECB rates are not directly affected.
