Turkey central bank cuts cheap dealer funding in latest lira move

ANKARA: Turkey's central bank will halt funding that had allowed primary dealers to borrow well below its policy rate of 8.25pc, it said on Tuesday in the latest step to squeeze credit and try to stabilize a weak lira currency.

Despite growing expectations for a formal interest rate hike, the central bank has raised the cost of funding via backdoor channels in recent days, after the lira hit record lows last week.

The latest move will be imposed on Wednesday. In previous weeks, primary dealers were able to borrow some 38 billion lira ($5.22 billion) at a rate of 7.25pc, but a trader said that amount was reduced to 19 billion as of Monday.

The cost of funding will likely increase to 9.75pc as a result of Tuesday's step, compared to an expected level of 9-9.5pc before the move, the trader told Reuters.

The lira rose 0.7pc after the announcement and stood at 7.29 against the dollar at 0747 GMT.

It hit a historic intraday low of 7.3650 on Friday as concerns loomed over depleted FX reserves and Turks buying up foreign currencies.

The currency is among the worst performers in emerging markets this year, down some 19pc.

Tim Ash of BlueBay Asset Management said the latest move only delays more decisive action.

"The strategy of doing everything possible to delay a formal rate hike failed in 2018. Why would it work in 2020?" he said on Twitter of the currency crisis two years ago.

Turkish President Tayyip Erdogan has long opposed high rates and sacked the last central bank governor for ignoring instructions.

He said on Monday he hopes market rates will fall further in order to make investments in the country easier.

The bank has halted repo auctions and directed banks to borrow at a higher rate, and also halved the liquidity limit to primary dealers, one of the cheapest methods of borrowing.

Average funding costs stood at 8.32pc on Tuesday, up from 7.88pc last week and 7.34pc in mid-July.