Turkey’s Central Bank plans to tighten liquidity to prop up lira

Bloomberg

Turkey’s central bank is taking more steps to prop up a tumbling currency by forcing banks to borrow at a higher rate, said a person with direct knowledge of the matter. The lira surged against the dollar.
The central bank didn’t offer any funding to local lenders at 8 percent through the one-week repo auction on Thursday, with banks expected to borrow at 10 percent from the so-called late liquidity window, said the person, who spoke on condition of anonymity because the information isn’t public. The regulator is also considering foreign-exchange sales as a means of intervention.
The move comes after the lira weakened for five consecutive days against the dollar, extending last year’s 17 percent slump. The central bank raised interest rates for the first time in almost three years in November but was unable to arrest the lira’s decline, with Turkey’s economy hurt by political instability and terrorist attacks and weakening global demand for riskier assets weaker since Donald Trump’s election victory.
“Funding through late liquidity might create a significant tightening,” said Sakir Turan, Odeabank AS economist in Istanbul. “This would of course support the lira in the short term by raising the cost of central bank funding provided to the market.”
The currency reversed losses and gained as much as 1.5 percent against the dollar, the biggest advance since Dec. 7. It was trading 1.4 percent higher at 3.8131 per dollar in Istanbul.
“It seems the central bank conducted a ‘backdoor’ monetary policy tightening by raising borrowing costs for local banks,” Piotr Matys, an emerging-market currency strategist at Rabobank in London, said by e-mail. “It is too early to judge whether the lira is out of the woods just yet. A substantial rate hike on January 24 may be required if the lira continues to fall ahead of the meeting.”
On Tuesday, the central bank said it may intervene to protect price and financial stability amid the lira’s depreciation. It also announced measures to boost foreign-exchange liquidity and lowered commercial lenders’ lira borrowing limits, though it stopped short of any hint of raising interest rates.
That omission seemed to disappoint investors, who have been calling for higher borrowing costs to put a floor under the currency. The lira gained only briefly after Tuesday’s announcement, before resuming its decline.