Turkey Real Rate Decision May Be Ongoing Liquidity Operations

  • Central bank to unveil cash on offer by 9:30 a.m. Wednesday
  • Policy makers’ intent to backstop currency will be tested

The Turkish central bank may have checked most of the boxes at its policy meeting on Tuesday, but the next big hurdle for the nation’s currency will be centered around tomorrow’s liquidity operations.

The monetary authority raised its overnight and late-liquidity rates in line with market expectations on Tuesday, helping limit losses in the lira. Whether it continues to push up funding costs tomorrow by forcing lenders to borrow through its more expensive late-liquidity window may be just as important for the currency’s performance.

The lira has slumped more than 6 percent this year, the worst performance by an emerging-market currency, on speculation that policy makers are reluctant to raise borrowing costs to curb accelerating inflation because of political pressure. In the run-up to Tuesday’s decision, the central bank tightened liquidity by limiting lenders’ access to cash, forcing them to borrow funds at more expensive rates.

“The central bank’s liquidity operations tomorrow will determine the trajectory of the lira, with maintenance of the funding mix assuaging market fears, strengthening policy credibility, and leading to a mildly stronger lira,” Phoenix Kalen, a strategist at Societe Generale SA in London, said by e-mail. “If the central bank digresses substantially from the pattern established over the past week, then the market will have more concerns regarding policy makers’ commitment to stabilize currency weakness.”

The lira traded 0.2 percent lower at 3.7631 per dollar as of 7 p.m. in Istanbul after sliding as much as 1.9 percent immediately after the rate decision. The central bank raised its overnight lending rate by 75 basis points to 9.25 percent, matching economists’ expectations.

“Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered,” the central bank said in its statement today.

The monetary authority will announce its liquidity operations by 9.30 a.m. on Wednesday.

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