Turkey’s overnight interest rate rose to the new upper band of the rate corridor, around 49%, on Friday, a day after the central bank’s surprise policy tightening and separate steps to ensure market liquidity, two traders said.
The central bank’s actions show that overnight rates will continue to stand around 49% for some time, traders also said.
On Thursday, the bank hiked its main policy rate to 46% from 42.5% and lifted the overnight lending rate to 49%. The move reversed an easing cycle in response to market turmoil triggered by the arrest of Istanbul’s mayor last month.
Since the arrest, the central bank has sold foreign currency to protect the lira, leading to a roughly $50-billion fall in its net position. It also bought back some 120 billion lira in government bonds to smooth market functioning.
On Friday, the bank opened two one-week repo auctions with a total value of 100 billion lira, after having paused the auctions in mid-March to address the market volatility.
Total bids exceeded 462 billion liras for the auction. Traders said banks needed to borrow some 200 billion lira from Borsa Istanbul on the overnight market to meet liquidity needs.
“The fact that the central bank is meeting a certain amount of the market’s liquidity needs instead of meeting all is an indication that the bank will want to keep the interest rate at the upper band of the corridor in the coming days,” a senior banker said.
On Thursday, sounding a more hawkish tone than previous policy statements, the central bank said its stance “will be tightened in case a significant and persistent deterioration in inflation is foreseen.”
(Reporting by Nevzat Devranoglu; Editing by Ezgi Erkoyun and Jonathan Spicer)
