Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Turkey Expands Rate Corridor But Unexpectedly Holds Benchmark

Published 10/22/2020, 07:08 PM
Updated 10/22/2020, 07:36 PM
© Bloomberg. Local residents use banknotes to pay for coffee at a cafe in the Eminonu district of Istanbul, Turkey, on Thursday, May 14, 2020. The global demand shock that followed the coronavirus pandemic is exposing a key vulnerability for Turkey’s external finances, with stimulus at home worsening an imbalance between imports and exports while creating another pressure point for the lira. Photographer: Kerem Uzel/Bloomberg

© Bloomberg. Local residents use banknotes to pay for coffee at a cafe in the Eminonu district of Istanbul, Turkey, on Thursday, May 14, 2020. The global demand shock that followed the coronavirus pandemic is exposing a key vulnerability for Turkey’s external finances, with stimulus at home worsening an imbalance between imports and exports while creating another pressure point for the lira. Photographer: Kerem Uzel/Bloomberg

(Bloomberg) -- Turkey raised the upper bound of its interest-rate corridor but unexpectedly left its benchmark on hold on Thursday, risking further volatility in the lira as the central bank sticks with its stealth tightening to contain the currency’s weakness.

The Monetary Policy Committee left its key one-week repo rate at 10.25%, a decision forecast by just two of 27 respondents in a Bloomberg survey. The late liquidity lending rate was raised to 14.75% from 13.25%, doubling the gap with the central bank’s overnight lending rate to 300 basis points.

Governor Murat Uysal surprised investors last month with a 200-basis-point increase and has since tightened policy further by restricting funding at the benchmark rate, forcing banks to borrow using costlier options. But he hasn’t arrested the currency’s fall: the lira dropped another 2% against the dollar since the September rate decision, a period in which most major world currencies gained. That brings its depreciation in 2020 to almost 25%.

Since ceasing to provide liquidity at its cheapest rate by suspending one-week repo auctions in August, the central bank’s approach has effectively been to tweak the cost of funding on a daily basis, modifying the amount of liquidity available to lenders across its various rates.

Using backdoor channels to contain the currency’s weakness, the bank has raised the weighted average cost of funds to 12.52% on Wednesday from as low as 7.34% three months earlier.

The tightening follows 1,575 basis points of easing in nine consecutive steps until June, which left Turkey’s inflation-adjusted borrowing costs among the lowest in the world but helped the government provide support to the $740 billion economy during the pandemic.

The latest decision suggests the monetary authority is likely to maintain its backdoor policy setup.

©2020 Bloomberg L.P.

© Bloomberg. Local residents use banknotes to pay for coffee at a cafe in the Eminonu district of Istanbul, Turkey, on Thursday, May 14, 2020. The global demand shock that followed the coronavirus pandemic is exposing a key vulnerability for Turkey’s external finances, with stimulus at home worsening an imbalance between imports and exports while creating another pressure point for the lira. Photographer: Kerem Uzel/Bloomberg

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.