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.