“Does the boss know?” That was the tantalising question rippling through Turkey’s markets on August 14 as the central bank essentially introduced a ‘hidden’ interest rate hike to address the collapse of the Turkish lira (TRY).

The move seemed to have a positive impact—the embattled TRY, which by the weekend was down by as much as 45% versus the dollar in the year to date, gained as much as 7.32% d/d to trade at 6.3797 against USD as of 20:00 local time.

President Recep Tayyip Erdogan notoriously pushes unconventional economic theories that appear to rule out interest rate hikes even when an economy is beset by double-digit inflation, a nosediving currency and overheating—as Turkey’s currently is. For Erdogan—who claims Turkey’s currency crisis is the result of an economic attack by foreign powers rather than economic fundamentals—to publicly get behind monetary tightening would be seen as him accepting a helping of humble pie. So what if the central bank was to get devious or come up with a face-saving way to hike rates?

Well, consider this. The day saw the central bank return to its unorthodox interest rate corridor policy. Thus the regulator did not on August 13 and August 14 hold its regular one-week repo auctions in which it funds lenders at its main policy rate of 17.75%. As a result, the authority pushed lenders to the overnight borrowing rate of 19.25%, suggesting a concealed 150bps rate hike.

Additionally, the central bank on August 14 increased its TRY interest rate in its regular Foreign Exchange Deposits Against Turkish Lira Deposits Auction to 19.25% from 17.75% on the previous day.

 “And the central bank finally came to the table with some behind the scenes tightening. Bit of a repeat of the central bank under [former Turkish central bank governor Erdem] Basci—say one thing to Erdogan and in public and, meanwhile, tighten behind the scenes,” Timothy Ash of Bluebay Asset Management said in an e-mailed comment.

“The central bank employed a de facto 150bps rate hike,” Ibrahim Turan, the former head of Borsa Istanbul, said in a tweet, adding that “the reason [for the] curbing [of] the USD rate was the increase in [the] lira cost”.

“Side effects”
“This method has side effects, even it is effective in the short term, since it will increase uncertainty, it could cause hesitation among investors through evoking abandoned interest rate corridor policy, and the central bank will digress from its promise,” Turan added.

“Positive as an initial step but it wouldn’t be correct to stay like this,” economist Haluk Burumcekci told BloombergHT. “It would be correct to align the policy rate with this at the next Monetary Policy Committee (MPC) meeting [in September] or earlier,” Burumcekci added.

An unnamed liquidity desk official at a Turkish lender told Reuters that the lenders were not in need of excess liquidity, so they did not use the overnight borrowing window at the central bank. The central bank’s repo and deposit swap auctions patently showed that the authority was employing a 150bps rate hike, the banker also said.

Given the regulator’s adopted course of action, the central bank’s weighted average cost of funding reached 17.91% on August 14 from 17.77% on August 13 and 17.86% on August 10. Prior to August 10, the lenders’ average funding rate stood at its main policy rate of 17.50%.

The central bank simplified its unorthodox interest rate corridor policy as of June 1. It has mainly been funding the lenders at its main policy rate through one-week repo auctions since then.