Turkish central bank releases $500mn of liquidity via new deposit swaps market

By bne IntelliNews January 18, 2017

The Turkish central bank on January 18 provided around $500mn of liquidity with a maturity of one-week to Turkish lenders at the first auction held under the scope of the newly launched FX Deposits Against Turkish Lira Deposits market, Reuters reported.

Given the political heat it is under, the central bank is being pressured to pursue unorthodox monetary policy methods instead of simply hiking policy rates in its struggle with rising inflation and the depreciating Turkish lira. Since January 12, the central bank has been implementing an “implicit” rate hike - or "covert tightening" as some observers describe it - within its interest rate corridor. This involves opting to not hold one-week repo auctions and instead funding the banking system via overnight lending and the late liquidity window, which come with higher interest rates.

The one-week repo rate of 8% is the central bank’s main policy rate, but the overnight lending rate stands at 8.5% and the late liquidity lending rate is currently at 10%.

On January 17, the central bank announced that it decided to open the Foreign Exchange Deposits Against Turkish Lira Deposits market, which amounts to another move aimed at supporting liquidity conditions in favour of the lira. The support is to be achieved through FX swaps. The regulator has thus established a new interbank market which enables the banks to swap their Turkish lira and FX-denominated deposits.

Demand was at $611mn at the first FX swaps auction on January 18 while the central bank set interest rates of 0.75% on the USD and at 8% on the lira, according to Reuters. Unnamed bankers told the news agency that state-owned lenders showed the stronger interest in the FX swaps auction.

The central bank has not held a one-week repo auction since January 12. President Recep Tayyip Erdogan, who has declared war against high interest rates, held a surprise Economic Coordination Committee meeting on January 16. It came shortly after the central bank launched its new strategy of not holding the daily one-week repo auctions. Central Bank Governor Murat Cetinkaya attended the meeting. The continuation of the central bank’s hidden rate hike strategy may point to the governor having convinced Erdogan of its merits at the meeting.

Since January 16, the central bank has also been limiting the amount of available borrowing to Turkish lenders on the interbank money market and the Borsa Istanbul (BIST) repo markets, which is offered with a rate of 8.5%. This has essentially forced domestic lenders to use the late liquidity funding at the 10% rate.

As a result, the average funding costs of Turkish lenders rose to above 9% on January 17 from 8.73-8.75% on January 16 and 8.39% on January 13, according to Reuters.

The Turkish lira lost 0.83% d/d against the USD and was trading at 3.7888 as of 13:46 Istanbul time on January 18.

The markets are awaiting the results of the central bank’s next rate-setting meeting, scheduled for January 24, as well as Fitch Rating’s next Turkey rating review on January 27.

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