The Central Bank of the Republic of Turkey (CBRT) announced on Monday it would restart one-week repo auctions for liquidity management. This move aims to simplify the central bank’s monetary policy framework and ensure its policy rate, the one-week repo rate, becomes the primary indicator for short-term market rates. The CBRT had largely stopped using one-week repo auctions in March 2021, opting instead for alternative funding tools and a more complex monetary policy mix.
The decision comes as part of a broader shift towards orthodox economic policies under the new economic team, led by central bank governor Hafize Gaye Erkan and finance minister Mehmet Simsek, both appointed after the May elections. Previous policies, which kept interest rates low, were widely criticized for contributing to high inflation and a significant depreciation of the Turkish lira. Since the new leadership took over, the central bank has aggressively hiked interest rates, raising the policy rate from 8.5% to 17.5% over two meetings in June and July, a total increase of 900 basis points.
The restart of one-week repo auctions is expected to consolidate monetary tightening efforts and improve policy predictability. This should allow the central bank’s policy rate to be more directly reflected in the market. However, concerns about persistent high inflation remain. Turkey’s annual inflation rate stood near 48% in July, and some analysts suggest that more aggressive rate hikes might be necessary to effectively bring inflation under control.
This measure from the CBRT is anticipated to have a positive impact on stabilizing the Turkish lira and rebuilding confidence among foreign investors. Increased clarity in monetary policy could reduce market uncertainty, potentially influencing government bond yields. However, with inflation still running high, the ultimate effectiveness of this policy adjustment will depend on future inflation data and any further interest rate decisions.
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