TCMB's Repo Relaunch: Market Expectations for Rate Cuts and Policy Implications

The Central Bank of the Republic of Turkey (TCMB) reinstated its weekly repo auctions on August 23, injecting liquidity into the money market at a 37% repo rate.

Repo Relaunch: Market Reaction

■HSBC Global Investment Research notes that the repo auctions were widely anticipated, though the exact timing remained uncertain.

■A potential decline of the repo rate from 37% to 34% could shape market expectations for September.

■Ongoing geopolitical tensions in the Middle East may prolong the need for liquidity, extending the decision horizon.

Rate‑Cut Probability: HSBC Modeling Insights

■HSBC’s OIS pricing signals an approximate 40‑basis‑point cut expectation for the September policy meeting.

■A cumulative 170‑basis‑point easing by year‑end is embedded in the model scenario.

■In a more dovish outlook, the weekly repo rate could settle at 34% by the end of 2026.

Inflation and Long‑Term Policy Rate Outlook

■HSBC projects inflation to retreat to 15% by 2027, with the policy rate falling to 20%.

■Achieving these targets would likely trigger a robust rally in Turkish‑lira denominated bonds.

■Nevertheless, the current level of rate reductions is deemed too aggressive for banks to fully embrace.

Liquidity Flow and Bond Market Volatility

■Following the repo restart, sovereign bond yields slipped by 50‑60 basis points.

■The steepening of the OIS curve throughout the day reinforced market expectations of further easing.

■Regional conflict risks and oil price swings keep the threshold for a new rate‑cut cycle elevated.

Markets interpret the TCMB’s repo reinstatement as a harbinger of a policy shift. In the short term, the liquidity boost has driven bond yields lower and steepened the OIS curve. Yet, geopolitical uncertainty and persistent inflation pressure compel a cautious approach to rate cuts. The impact on SME lending and commercial credit growth points to banks seeking a new balance on their balance sheets. Consequently, investors are likely to re‑price risk premiums and tilt portfolios toward diversification.