Turkey CB Tightens Liquidity to Prop Up Declining Lira

Turkey’s central bank finally gained traction in its efforts to prop up the lira. The currency surged the most in more than a year after the regulator didn’t offer any funding to local lenders through the usual one-week repo auction at 8% on Thursday.

Instead, banks were expected to borrow at 10% via the so-called late liquidity window, according to a person with direct knowledge of the matter, who spoke on condition of anonymity because the information isn’t public, Bloomberg reported.

With President Recep Tayyip Erdogan often voicing opposition to raising rates, the move shows policy makers getting creative after failing to arrest the decline in the lira—which after last year’s 17% slump, weakened for five days through Wednesday. The central bank lifted interest rates for the first time in almost three years in November to little avail, with Turkey’s economy hurt by terrorist attacks and political instability, and weakening global demand for riskier assets since Donald Trump’s election victory.

“It seems the central bank conducted a ‘backdoor’ monetary policy tightening,” Piotr Matys, an emerging-market currency strategist at Rabobank in London, said by e-mail. “It is too early to judge whether the lira is out of the woods just yet. A substantial rate hike on January 24 may be required if the lira continues to fall ahead of the meeting.”

Investors have been calling for the central bank to put a floor under the lira with higher interest rates, and when the central bank said on Tuesday it may intervene to protect price and financial stability, the market focused on the omission of any plan to alter borrowing costs. The lira gained only briefly after Tuesday’s announcement, before resuming its decline.

That changed following the lack of a one-week repo auction on Thursday. The lira reversed losses and gained as much as 2.5% against the dollar—the biggest advance since November 2015. It was trading 1.9% higher at 3.790 per dollar in Istanbul.

 “Funding through late liquidity might create a significant tightening,” said Sakir Turan, Odeabank AS economist in Istanbul. “This would of course support the lira in the short term by raising the cost of central bank funding provided to the market.”