Lira Slumps as Turkish Central Bank Waits to Raise Cost of Funds

Turkey’s lira extended the longest stretch of losses in almost three months after the central bank said it would wait until next week to raise the cost of funding to lenders.

The currency lost 0.5 percent to 2.2640 to the dollar by 6:17 p.m. in Istanbul, having climbed as much as 0.6 percent earlier. The lira, the worst performer this year among peers in emerging Europe and Africa monitored by Bloomberg, fell for the eighth day. Yields on Turkey’s two-year bonds climbed three basis points to 10.22 percent, the highest level since Jan. 6.

The lira plunged to a record 2.2691 yesterday after the central bank left interest rates unchanged, opting instead to introduce a 9 percent cost of funds on so-called extra-tightening days, up from the usual 7.75 percent. The central bank said today it would hold an extra tightening day on Jan. 27, in addition to an earlier plan to do so on Jan. 30.

“Prior to the announcement, the market was expecting a more frequent tightening,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said by e-mail today. Adding only one additional day next week “amounts to a 25 basis-point increase to weekly average interest rates,” he said.

On the extraordinary days, the central bank offers no funds at its benchmark 4.5 percent rate. Yesterday’s decision means it also won’t offer funding at 7.75 percent on such days, according to an official at the bank today, who asked not to be named citing policy.

Lira Volatility

The lira has come under renewed pressure in the past month amid a corruption probe that has embroiled the government of Prime Minister Recep Tayyip Erdogan and shaken investor confidence. Goldman Sachs Inc. and Morgan Stanley were among a minority of analysts projecting an increase of at least 50 basis points to the overnight lending rate of 7.75 percent.

The currency’s implied volatility was 13.22 percent today, the highest among peers in emerging Europe and Africa after South Africa’s rand. The central bank introduced the 9 percent funding rate as it tackles inflation that it expects to stay “markedly” above its 5 percent target.

The measures “will increase the cost of the lira to decrease the volatility” and drive inflation toward the target in the medium-term, Inanc Sozer, an economist at Odea Bank AS in Istanbul, said in an e-mailed report today.

Central bank rate policy will continue to be a “secondary” factor in lira weakness, with the primary driver being the pace of Federal Reserve tapering, Isik Okte, chief strategist at the investment unit of Istanbul-based Turkiye Halk Bankasi AS, said by e-mail today.

The lira has fallen about 19 percent since the Fed first said on May 22 that it would start trimming its $85 billion monthly bond-buying program, the first step of which was agreed to last month. U.S. policy makers next meet Jan. 28-29.

The Borsa Istanbul 100 Index of Turkish stocks gained 1.6 percent today, bringing its advance this week to 2.6 percent.

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