Turkey Boosts Funding Costs to Avoid Outright Rate Hikes

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Turkey’s central bank offered the nation’s lenders funding through a more expensive channel in the latest effort to reverse declines in the lira without raising its key interest rate.

Policy makers on Thursday conducted a 20 billion-lira ($2.7 billion) one-month repo auction through what they call the conventional method. The average simple rate for lenders that received funding was 10.96%, 271 basis points higher than the central bank’s benchmark.

Unlike another method in which the central bank sets the yield, the price is determined through lenders’ bids. Since the regulator ceased to provide liquidity at its cheapest rate of 8.25% by suspending one-week repo auctions last week, Turkish banks in need of liras took part in the auction and drove up the cost of money.

The lira dropped after the central bank announced the auction but erased its loss following the results. It traded little changed at 7.3338 per dollar as of 1:17 p.m. in Istanbul. It’s down nearly 5% so far this month in the worst performance globally.

Torn between market pressure to raise borrowing costs and President Recep Tayyip Erdogan’s persistent calls to lower them, Turkey’s central bank is looking for a backdoor way to increasing the cost of money. Rather than changing the main one-week repo, the central bank now tweaks the cost of funding on a daily basis, modifying the amount of liquidity available to lenders across its various interest rates.

The central bank said Thursday it also opened a three-month auction to swap 20 tons of gold for liras using the same auction method.

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