May 09 2019

Turkey raises borrowing costs by discarding benchmark rate again

(The story was updated with comments from analysts in the sixth and last paragraphs.)

Turkey’s central bank suspended lending at its benchmark interest rate of 24 percent, forcing banks to borrow at a higher cost, in an attempt to defend the embattled lira.

It was the second time in two months that the bank temporarily halted the auctions of one-week repo as it sought to bolster the lira, which fell to the lowest level since September on Thursday. Instead it will lend at the so-called "late liquidity window" rate of 25.5 percent. 

“Considering the developments in financial markets, it has been decided to suspend the one-week repo auctions for a period of time,” the bank said in a statement on its website. It provided no more details or explanation.

The Turkish lira has slid 15 percent against the dollar this year, adding to losses of 28 percent in 2018, when a currency crisis ravaged the economy. Some investors have begun calling on the central bank to raise the benchmark rate from 24 percent, arguing that other monetary policy tinkering is insufficient and that its foreign currency reserves have dropped to dangerously low levels.

But Central Bank Governor Murat Çetinkaya is under pressure from the government of President Recep Tayyip Erdoğan to keep interest rates suppressed after the economy flipped into recession in the second half of last year from previously strong growth, which was supported by government stimulus such as tax cuts and loan guarantees.

"Another step in the playbook of the CBRT to - in all circumstances - prevent a REAL rate hike," said Nora Neuteboom, an emerging markets economist at ABN Amro, in comments on Twitter. "Not credible given that they abandoned the corridor system last year."

The lira dropped to as low as 6.246 per dollar in trading in Istanbul on Thursday before the bank's decision was announced. The move by policymakers appeared to have little effect on the currency, which was down 0.9 percent at 6.241 per dollar at 3:48 p.m. local time.

Last May, the central bank abandoned an unconventional interest rate corridor that had left investors struggling to understand its policy for years. Instead, it pledged to lend only at the one-week repo rate, leaving other lending and borrowing rates at 1.5 percentage points above and below the benchmark, respectively.

Thursday's move comes less than two weeks after the central bank dropped a pledge to raise interest rates if needed to support the lira and fight inflation.

"In the end you have to feel sorry for the CBRT - they are being forced to manage momentary policy with both hands tied behind their backs while being forced to hop on one leg. Idiotic," said Tim Ash, senior emerging markets strategist at London-based hedge fund Blue Bay Asset Management.

http://tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Announcements/Press+Releases/2019/ANO2019-20