The Turkish lira hit its latest all-time low—of 7.6408 to the dollar—on September 21 against a backdrop in which analysts were predicting that Turkey’s central bank will stick with backdoor tightening rather than bring in a formal interest rate hike when its monetary policy committee (MPC) meets on September 24.
Analysts including observers at Goldman Sachs have said the regulator would likely use the meeting to nudge up its late liquidity window (LLW), which at 11.25% is the highest of a handful of interest rates that it controls. That could help protect the lira—down 23% this year and around 50% since the end of 2017—but to what degree is the important question as Turks remain fearful of a disorderly rapid depreciation and a second currency crisis within just over two years.
While most economists polled by Reuters expected no formal hike this week, they predicted the central bank would continue to take steps to raise the weighted average cost of funding, which within two months has risen to 10.4% from 7.3%.
Deutsche Bank was among the minority in anticipating a rate hike, forecasting a 200bp rise in the key one-week repo rate, which has remained at 8.25% since May.
But Kevin Daly at Goldman Sachs said the national lender would rather likely raise the LLW to 12% 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%. “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.
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