Turkey Tries Backdoor Hike in Borrowing Costs to Boost Lira

Turkey’s central bank unexpectedly raised borrowing costs for the country’s lenders in an attempt to bolster a currency battered by political turmoil and a broader sell-off across emerging markets.

The lira trimmed losses after the central bank announced the suspension of its one-week repo auctions on Thursday, ceasing to provide liquidity to lenders at its cheapest rate of 24 percent. In a statement, the regulator attributed the decision to volatility in financial markets.

The decision effectively raises the cost of funding by 150 basis points without an official increase in the benchmark interest rate.

The lira, already among the worst-performing currencies in emerging markets this year, has come under renewed pressure this week amid fears of an erosion in Turkey’s democracy following a ruling party challenge to elections and concern over the central bank’s commitment to raising rates if needed to curb inflation. The regulator has used fringe tools to bolster the currency in the past, most recently in March when it suspended repo auctions for two weeks.

“It is an attempt to slow down the rapid ascent of the dollar-lira pair,” said Piotr Matys, a London-based analyst at Rabobank. “But it will not change the underlying upside bias supported mostly by domestic factors — mainly political risk — with additional support coming from the negative external backdrop.”

The lira pared losses after the announcement and was trading 0.9 percent weaker at 6.2376 per dollar at 3:07 p.m. in Istanbul.

What Bloomberg’s Economists Say

“The tightening of monetary policy through the suspension of the one-week repo auction is unlikely to stem the decline in the lira — the problems today are more political than economic. And low interest rates on bank deposits limit the effectiveness of any hikes by the central bank.”

–Ziad Daoud, Mideast economist.

The central bank’s next monetary policy meeting is scheduled for June 12, shortly before a rerun of municipal elections in Istanbul, after authorities annulled the March 31 vote where the opposition won the mayor’s seat for the first time in 25 years./Bloomberg

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