Local banks’ borrowing limits at the Central Bank of the Republic of Turkey (CBRT) interbank money market for overnight transactions at 9.75% will be cut to half their current limits effective from August 19, the central bank said on August 18. As a result, the national lender is pushing the banks to its late liquidity window at 11.25%, bankers told Reuters.

As of August 17, the CBRT’s weighted average cost of funding, which excludes USD-Turkish lira (TRY) swaps with local banks, reached 9.17% from 7.34% as of July 16. The headline policy rate stands at 8.25%.

The central bank will again be seen as dancing around what many analysts see as a clear need for a policy rate hike to defend the embattled lira. The move is the latest example of it tightening the currency via backdoor measures. The CBRT’s current funding composition, previously criticised as “confusing”, is clearly a knotty problem as things stand.

Turkish central bank open market operations funding composition (@scornek).

Under regular one-week repo auctions, the interest rate is constant at 8.25% and banks bid in amounts.

At the latest one-month repo auction on August 18, the central bank provided TRY10bn to lenders at 11.3%. A day before on August 17, the amount was set again at TRY10bn and the interest rate was set at 11.25%.

These are small amounts in the CBRT’s daily funding, which stands above TRY200bn, but the approach tries to send the message that it is open to rate hikes and allows market makers to set the rates.

At the latest USD/TRY swap auction held on August 17, the implied lira rate reached 10.95% from 8.23% in the auction held on August 5.

Turkish central bank swap auctions (@scornek).

Mortgage rates rose to 9.38% as of August 7 from 9.05% as of July 3 while commercial loan rates increased to 11.9% from 10.4%.

Meanwhile, deposit rates remain unattractive despite a limited rise. The weighted average TRY deposit rate for maturities of up to three months (maturities are generally short in Turkey) rose to 8.7% as of August 7 from 8.2% a week ago. Annual inflation officially stands at around 12%.

Domestic government bond yields are also on the rise, although it is hard to call this market “a market” due to systematic interventions made since November 2018. The latest took the form of an asset ratio imposed on local banks.

All in all, the government is still wasting its time and central bank reserves rather than introducing a logical policy set.

On August 20, the central bank will hold a monetary policy committee (MPC) meeting. Median estimates in polls among market participants suggest that the market expects no change in the policy rate, with the backdoor tightening moves to continue.

Does Turkey have an inflation problem? Or has inflation always been a perennial feature in the life of the Republic?

 

 

Can Turkey's inflation dilemma be attributed to the printing of too much lira?

The local finance industry then declared that only fools would stay in FX given the huge returns offered on lira deposits. Right now, that very same finance industry does not have the nerve to call on people to turn to lira amid the latest severe bout of its depreciation.

The impact of foreign traders on the USD/TRY is at negligible levels right now. As a result, FX demand is driven by locals.

FX-denominated deposits at local lenders are breaking consecutive records. Although these amount to ‘just bank records’ and do not create real FX demand, the sheer level of the deposits points to smoke on the horizon.

Data from the Turkish mint on gold coins production is another interesting indicator, pointing to intense demand for physical gold from locals. The mint produced a record 10.4 tonnes of gold coins in July.