Policy Funding Shift
On 1 March 2026, the CBRT suspended its one-week repo auctions and said it would instead fund via the 40% overnight lending rate, described as 300 bps above the policy rate, with no end date given. The CBRT also announced it will conduct TRY-settled FX forward selling transactions, aiming to support the proper functioning of the FX market. Inflation is presented as another constraint on easing: headline CPI rose to 31.53% y/y in February from 30.65% in January, while core inflation has hovered around 33% over the past 12 months. The central bank’s recent actions, effectively lifting the cost of funding to 40% through a “stealth” hike, have altered expectations for the 12 March meeting, shifting the base case to a hold at 37% rather than a cut, amid escalation in the Middle East and its potential spillovers to Türkiye.Market Volatility Outlook
The increased uncertainty is expected to push implied volatility higher in USD/TRY options; one-month volatility has recently climbed towards 30%, indicating elevated stress, and strategies positioned for larger swings may benefit as CBRT defensiveness meets geopolitical pressure on the lira. The risks are already showing in markets: Brent crude has surged above $95 a barrel, raising inflation risks for an energy importer, while the 5-year CDS spread widened about 40 bps to 345 bps in days, implying higher risk premia for Turkish assets. For rates markets, the lira forward curve may need to reprice for a higher-for-longer path, forcing the unwind of easing positions; paying fixed on short-term interest rate swaps is described as a more logical stance under this shift. Looking back, the 2025 hiking cycle aimed to curb inflation and stabilize the currency, but the new external shock threatens the disinflation path as headline inflation has already ticked up; CBRT actions may offer a near-term floor for the lira, but downside risks are seen as dominant. Create your live VT Markets account and start trading now.
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