Turkey’s central bank took a further step to push up the cost of borrowing on Tuesday, two days before its monthly rate-setting meeting, as the lira again touched a record low against the dollar.
In its latest tightening move the central bank halved banks’ borrowing limits for overnight transactions in the interbank money market from Wednesday, signaling that the cost of borrowing will move to a higher rate of 11.25 percent, bankers said.
The lira was little moved, trading at 7.3880 against the dollar at 0846 GMT, slightly firmer than its close of 7.3930 on Monday. Shortly after the central bank announcement, it weakened to 7.40, matching a record low.
The currency has weakened in eight of the past nine trading days, mainly on concerns over the central bank’s depleted forex reserves, costly interventions in the forex market and Turks’ surging demand for hard currencies.
As the lira declined, analysts’ expectations for an interest rate hike have increased, but the central bank has so far taken back-door steps to tighten policy, including liquidity measures and directing lenders to borrow at higher rates.
Two bankers said that Tuesday’s move to reduce liquidity limits at the overnight lending rate of 9.75 percent signals to the market that the central bank will switch to funding through the late liquidity window rate, at 11.25 percent.
The late liquidity window sits three percentage points above the policy rate and is the highest rate in the central bank’s interest rate corridor.
“While the timing is not clear because liquidity is not spread homogeneously, we understand from today’s step that the central bank will direct banks to late liquidity window funding,” one banker said.
The bank injected 10 billion lira in a traditional method repo auction on Monday at an average simple rate of 11.25 percent. It opened a repo auction via the traditional method on Tuesday as well.
As a result of such tightening steps in recent weeks, the weighted average cost of funding rose to 9.17 percent as of Monday, compared to a low of 7.34 percent on July 16.
A Reuters poll showed that while the central bank is expected to keep its policy rate on hold this week, it is seen driving funding costs higher with more back-door measures.