Turkey’s central bank unexpectedly tightened its monetary stance after the lira weakened, leading a retreat among emerging-market peers.
The bank is suspending one-week repo auctions for an unspecified period “considering the developments in financial markets,” it said yesterday in a statement on its website.
The announcement comes less than a year after the central bank said it would use one-week repos as its main funding tool, abandoning an older framework that allowed the institution to adjust daily the cost of cash provided to banks.
Currently, the central bank has two other instruments reserved for emergency lending, but it didn’t say which one it would use. Interest rates for overnight lending and the late liquidity window stand at 25.5% and 27%, respectively. The rate for the suspended repo auctions was 24%. The lira briefly trimmed its losses following the bank’s statement before weakening anew. The currency was trading 2% lower at 5.5786 per dollar at 4:26pm in Istanbul after falling as much as 2.5%.
The lira lost nearly 30% against the dollar last year as investors worried about the central bank’s ability to curb inflation in the face of calls from President Recep Tayyip Erdogan for lower borrowing costs.
The sell-off was exacerbated by strained ties between Ankara and Washington over the trial of a US evangelical pastor in Turkey.
Yesterday’s lira tumble came after Erdogan said US President Donald Trump’s move to recognise Israeli sovereignty over the disputed Golan Heights area it captured from Syria in 1967 had brought the region to the brink of a new crisis.
Erdogan’s comment revived worries about a possible worsening of relations between the Nato allies, which are already under strain because of Turkey’s purchase of Russian S-400 missile defence systems.
Following the sharp sell-off yesterday, the central bank said it would suspend one-week repo auctions, in a bid to decrease liquidity supplied to the market.
Traders said the move will increase the average cost of funding by a minimum of 150 basis points from 24% currently.
The suspension should improve the central bank’s credibility among markets as it reacted much faster to market moves than it did last year, said Guillaume Tresca, senior emerging markets strategist at Credit Agricole.
“Today, it took them just a few hours to basically tighten monetary policy.
I think it could help smooth the depreciation trend,” he said, adding that relations with the United States will continue to put pressure on the lira.
The lira hit a record low of 7.24 against the dollar last August, at the height of the diplomatic row over US pastor Andrew Brunson, who was convicted on terrorism charges by a Turkish court and then released in October.
The main Istanbul bourse index BIST 100 was down 3.42% at 1456 GMT, while the banking index was down 6.6%.
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