Turkey’s lira rebounded 1.8% yesterday and was on track for its best day in 10 weeks after the central bank said it would halt cheaper funding that had allowed primary dealers to borrow well below its policy rate.
The step, to be imposed today, was the latest effort to squeeze credit via backdoor channels and stabilise a currency that had plunged to record lows in recent days.
The lira was 7.23 against the dollar at 0943 GMT.
It hit a historic intraday low of 7.3650 on Friday and has lost more than 17% against the dollar so far this year, among the worst performers in emerging markets.
Expectations have grown the central bank will formally raise its 8.25% policy rate to boost confidence amid concerns over depleted reserves, costly state FX interventions and a trend of Turks buying foreign currencies.
In previous weeks, primary dealers were able to borrow some 38bn lira ($5.22bn) at a rate of 7.25%, under a policy to ease coronavirus fallout.
The central bank halved the amount in an earlier move.
The cost of funding is likely to increase to 9.75% as a result of yesterday’s step, compared with an expected level of 9% to 9.5% before the move, a trader told Reuters.
Average funding costs rose above the policy rate to 8.32% yesterday.
They had fallen to 7.34% in mid-July.
Tim Ash of BlueBay Asset Management said the latest move only delays more decisive action.
“The strategy of doing everything possible to delay a formal rate hike failed in 2018.
Why would it work in 2020?” he said on Twitter of the currency crisis two years ago.
Turkish President Tayyip Erdogan has long opposed high rates. He said Monday he hopes market rates will fall further to make investments easier.
The bank has halted repo auctions and directed banks to borrow at a higher rate, and said the economic recovery was gaining pace.
The main BIST 100 index was trading up 2.43%. The banking index was up 3.8% at 0950 GMT.
Meanwhile, Turkey’s industrial production is expected to have expanded 1.10% annually in June, when the country took controlled steps to reopen the economy following lockdown measures at the height of the coronavirus outbreak.
Turkey logged its first infection on March 11 and soon after many factories temporarily halted operations, leading to drops in factory activity during April and May of 31.4% and 19.9% respectively. The median estimate in a Reuters poll of seven institutions showed a year-on-year expansion of 1.10% of the calendar-adjusted industrial production index in June.
Forecasts ranged between an expansion of 7.8% and a contraction of 9.5%. Industrial production, viewed as a pre-cursor to economic growth, last expanded in February.
Turkey’s economy expanded by 4.5% year-on-year in the first quarter but it is expected to have contracted in the second quarter due to the measures to stem the spread of the pandemic.
The country launched major reopening step on June 1 as it sought to kick-start the economy and the government said Turkey could end the year with a positive reading in terms of GDP performance.
The Turkish Statistical Institute is set to announce industrial production figures on August 14.
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