Turkish lira: Policy normalization supports carry trade appeal – ING

ING analyst Chris Turner said Turkey's central bank has recently resumed one-week repo operations, marking an important step toward normalizing its monetary policy framework. Previously, the central bank had achieved an effective rate hike of around 300 basis points by suspending one-week repos and pushing interbank funding costs up to 40% via overnight lending rates. Now redirecting funding back to the 37% policy rate preserves a tight stance while enhancing policy transparency and predictability.

**Policy normalization path becomes clearer**

The core of the central bank's latest move is to streamline the interest rate transmission mechanism. While relying on the overnight lending window had tightened monetary conditions, it also increased market uncertainty. Resuming one-week repos and using the policy rate as the primary funding tool helps stabilize short-term rate expectations. Turner believes this shift supports lira carry trades, as a clearer rate framework reduces the policy risk premium investors face.

**Carry trade appeal and risks**

Against a backdrop of diverging policies among major central banks, the Turkish lira continues to attract carry inflows thanks to its relatively high nominal rates. Policy normalization further cements the rate advantage, allowing investors to capture yield spreads more steadily. However, lira exchange-rate volatility and inflation prospects remain key variables. USD/TRY is currently trading around 48.07459, with markets closely watching whether the central bank can sustain a disciplined tightening stance and whether inflation data will cooperate with further declines.

**External environment and capital flows**

Global risk appetite and dollar dynamics also influence lira asset performance. If major economies shift toward monetary easing, the appeal of high-yielding currencies could strengthen further. Turner also cautioned that the sustainability of capital inflows will depend on improvements in Turkey's economic fundamentals. Relying solely on high rates to attract hot money, without structural reforms, could leave the economy vulnerable to external shocks over the medium to long term.