The Turkish lira neared a record low on Friday as investors weighed up the central bank’s return to “stealth” tightening through its interest rate corridor, and warned that the bank may still end up needing to raise its policy rate.
The bank on Thursday surprised most analysts -- who expected a large rate increase -- when it left is key rate unchanged. It said significant tightening in financial conditions had already been achieved after steps to contain inflation risks.
Analysts were also caught out last month when the central bank raised rates by 200 basis points.
The lira slid to 7.9765 against the dollar from a close of 7.9450. It has lost 25 percent of its value this year, touching a record low of 7.9845 on Thursday after the bank’s decision.
Phoenix Kalen of Societe Generale said it appeared that the central bank was reverting to a strategy of “stealth tightening” via the interest rate corridor.
“(This) offers more flexibility to tweak daily funding conditions, but lacks the same transparency and predictability embodied in using a single policy rate,” she said.
She said the increase in the late liquidity window to 14.75 percent offered some consolation, indicating the bank is eyeing effective funding rates possibly going that high, if necessary.
“To be clear, policy is moving in the right direction,” she added.
Haluk Burumcekci of Burumcekci Consulting said the return to tightening policy via the rate corridor would prove ineffective and end with the need to raise the policy rate.
Its so-called backdoor measures to rein in credit have lifted the average cost of funding to 12.75 percent as of Thursday from 12.52 percent, compared with a July low of 7.34 percent.
Burumcekci said funding costs should now rise towards 14 percent and that using the interest rate corridor instead of a policy rate increase was a “negative shock” for market players.
“(It) means that the credibility that the bank gained from last month’s policy rate hike is completely lost,” he said.
The central bank had been expected to raise its policy rate by 175 basis points to 12 percent, tightening policy further in the face of lira weakness triggered by concerns about high inflation and the central bank’s badly depleted FX reserves.
It has been hit in recent weeks by geopolitical tensions, including the conflict between Armenia and Azerbaijan and the dispute between Ankara and Athens over maritime rights in the eastern Mediterranean.
Turkey’s central bank cuts rates 325 points in second easing moveTurkey’s central bank cut its policy rate by 325 points to 16.5 percent on Thursday, roughly as expected, its second marked policy easing in two ... Economy
Turkey revokes requirement for central bank deputy governors to be experiencedTurkey has revoked a requirement that central bank deputy governors have 10 years prior experience and dropped a rule that banks set aside 20 percent ... Economy
Turkey central bank seen making deeper rate cut on July 25The Turkish central bank is expected to cut its key interest rate by 250 bps from its current 24 percent on July 25, a Reuters poll showed on Friday, ... Economy
Fitch downgrades Turkey’s debt after central bank chief dismissalRatings agency Fitch on Friday downgraded Turkey’s sovereign debt by one notch to ‘BB-’ with a negative outlook, after President ... Economy
Erdogan says Turkey may face problems if central bank not revisedPresident Recep Tayyip Erdogan said Turkey could face serious problems if the country’s central bank is not completely revised after the ... Economy
Turkey removes central bank governor, appoints deputyTurkey has sacked the governor of its central bank and replaced him with his deputy, a presidential decree published in the official gazette said on ... Economy
Turkey’s central bank pledges financial stability after lira collapseTurkey's central bank on Monday announced it was ready to take "all necessary measures" to ensure financial stability after the collapse of ... Economy