Turkey’s tighter lira funding puts March rate meeting into focus

08/03/2017 07:28 AST

The Turkish lira’s short-term money market rates are shooting higher before the central bank meets next week on speculation that the authority may supplement its steps to tighten liquidity with a rate increase.

The lira’s implied yield - a gauge of interest rate expectations - has climbed above the top end of the monetary authority’s corridor as policy makers boosts short-term rates by limiting the amount of cash offered to lenders through cheaper facilities. The weighted average cost of bank funding has increased by 20 basis points since Thursday, when the latest round of tightening began.

Those steps have come as faster-than-forecast inflation and the prospect of higher US rates threaten to weaken the allure of holding Turkish assets.

The central bank boosted lenders’ cost of funding by 200 basis points in similar moves earlier this year implemented to stem the lira’s decline.

“The central bank will try to tighten liquidity further, and if it doesn’t work, I expect it may try to increase the interest rate on the late-liquidity window,” economist Fatih Keresteci wrote in an emailed note from HSBC. JPMorgan expects the bank will increase both the overnight lending rate and late liquidity window by 100 basis points this month. Annual inflation in Turkey has climbed to a five-year high of 10.13%.

The nation relies on capital inflows to finance its current-account deficit. The Turkish central bank next meets on March 16, one day after a Federal Reserve meeting where investors are pricing in a 25-basis-point rate increase.

The lira jumped 0.8% to 3.6789 per dollar yesterday, the biggest increase in almost two weeks.

Gulf Times