Turkey suspends one-week repo after lira hits eight-month low

ISTANBUL: Turkey's central bank suspended one-week repo auctions on Thursday to support the lira after it slipped 1 percent to its weakest level in nearly eight months on investor concerns about the decision to re-run Istanbul's mayoral election.

The lira stood at 6.2350 against the dollar at 1204 GMT, recovering some of the day's losses after the central bank announced that it would suspend repo auctions in response to what it called "developments in financial markets".

Earlier, the lira tumbled as far as 6.2460, its weakest level since Sept. 24, from Wednesday's close of 6.1790.

The suspension is one of the bank's secondary tools to tighten policy to stabilise the currency, gradually raising the average cost of funding from its benchmark one-week repo rate of 24 percent to the overnight lending rate of 25.5 percent.

Guillaume Tresca, senior emerging markets strategist at Credit Agricole, said a straightforward hike in the one-week repo rate would have been a better move.

"Even if the suspension of the one-week repo auction is the right move, the credibility of the (central bank's) policy is quite low," he said.

The central bank took similar action on March 22 after the lira plunged a week before local elections. Since the vote, and the contested outcome of the Istanbul mayoralty, the currency has weakened more than 10 percent.

After weeks of appeals by President Tayyip Erdogan's AK Party and its nationalist MHP ally, Turkey's High Election Board (YSK) ruled on Monday that Istanbul's mayoral election, which was narrowly won by the opposition, should be re-run.

NORMALISATION

Investors fear the decision to repeat the election on June 23 will add nearly two months of uncertainty over Turkey's plans to rebalance and stabilise the economy.

"Erdogan cannot really afford to lose again in Istanbul so he will do what is necessary to win the elections," Tresca said, adding that the government is likely to favour credit growth and increase public spending to garner support.

"We are not at the time really expecting any form of normalisation in the economy."

The cost of insuring exposure to Turkey's sovereign debt rose on Thursday, with five-year credit default swaps jumping 11 basis points from Wednesday's close to 483 basis points, similar levels to just before the March 31 polls, according to IHS Markit.

Turkey's dollar bonds slumped across the curve, with the 2026 issue dropping 1.6 cents, Refinitiv data showed.

The yield on the 10-year benchmark bond rose to 21.17 percent in spot trade from 20.99 percent on Wednesday, while the two-year benchmark bond surged to 24.43 from 23.05.

The main BIST100 share index was down 1.42 percent, while the banking share index tumbled 1.60 percent.

RESERVES

The lira lost nearly 30 percent of its value last year on concerns over the independence of the central bank as well as strained ties with Washington. It has also lost some 14 percent this year.

The central bank's net international reserves fell to $25.84 billion in dollar terms as of May 3, data showed on Thursday, while the its gross forex reserves stood at $72.63 billion.

Local investors have also lost confidence after last year's crisis, which caused forex deposits and funds including precious metals of local individuals to rise steadily in the six months to April.

Forex holdings of local individuals and institutions fell to $179.18 billion as of May 3, down 0/7 percent from the previous week, data showed on Thursday.

The lira's implied volatility gauges also jumped, over one week, one month and three months . The one-week gauge climbed to 17 vol from 14.5 vol.