Istanbul – The Turkish lira drifted further into record low territory on Monday and touched 7.58 against the dollar, as expectations grew that the central bank would hold rates steady this week but continue to tighten credit via the backdoor.
Analysts at Goldman Sachs and elsewhere said the bank would likely raise the highest of its three main rates, the late liquidity window (LLW), from 11.25 percent at its policy meeting on Thursday.
That could help protect the lira – which is down nearly 22 percent this year – from a more dramatic fall but probably only delay a formal hike to the 8.25 percent key policy rate, they said.
The currency was at 7.584 at 0745 GMT, slightly weaker than last week’s close. It is among the world’s worst performers this year in part due to aggressive monetary easing over the last year that left real rates deeply negative.
The bank is reluctant to restrict growth just as the economy is recovering from a nearly 10 percent contraction in the second quarter due to the pandemic. It also expects inflation to dip, though price rises have remained stuck in double-digits.
While economists polled by Reuters expect no formal hike this week, they predict the central bank will continue to take steps to raise the weighted average cost of funding, which has climbed to 10.4 percent from 7.3 percent in two months.
Kevin Daly at Goldman Sachs said the bank would likely raise the LLW to 12 percent given the combined pressure of depleted reserves, the hit to the tourism sector, and Turkey’s heavy external loan payment schedule through year end.
Ehsan Khoman at MUFG Bank forecast a rise in LLW to 11.75 percent. “The main risk … is that the authorities tighten policy too little and too late as they prefer to remain supportive of growth, a policy course which would add to the risks around the lira,” he wrote.