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    Turkey Widens Rate Corridor But Unexpectedly Holds Benchmark

    Abstract:Turkey raised the upper bound of its interest-rate corridor but unexpectedly left its benchmark on hold on Thursday, risking further volatility in the lira as the central bank sticks with its stealth tightening to contain the currencys weakness.

      Turkey raised the upper bound of its interest-rate corridor but unexpectedly left its benchmark on hold on Thursday, risking further volatility in the lira as the central bank sticks with its stealth tightening to contain the currencys weakness.

      The lira weakened as much as 2.1% against the dollar after the decision, sliding to a new record low of 7.9797, before recovering some of the losses.

      While the Monetary Policy Committee left its key one-week repo rate at 10.25%, a move forecast by just two of 27 respondents in a Bloomberg survey, it raised the late liquidity lending rate to 14.75% from 13.25%. That doubled the gap with the central banks overnight lending rate to 300 basis points.

      Governor Murat Uysal had surprised investors last month with a 200-basis-point increase -- a move that ran counter to President Recep Tayyip Erdogans demand for cheaper borrowing -- and has since tightened policy further by restricting funding at the benchmark rate, forcing banks to borrow using costlier options.

      But he hasn‘t arrested the currency’s fall: the lira continued to drop after the September rate decision, a period in which most major world currencies gained.

      Widening the spread between the late liquidity window and overnight lending rates could be interpreted as “some form of tightening,” said Piotr Matys, a London-based strategist at Rabobank.

      “However, the CBRT doesn‘t have sufficient credibility to experiment with the setup of monetary policy and should have sent a very strong hawkish signal by raising the policy rate,” he said. “The 200bps hike last month was an important step to restore credibility and today’s decision is unfortunately a step back at the time when the CBRT cannot afford to make a mistake as the lira is still vulnerable.”

      Since ceasing to provide liquidity at its cheapest rate by suspending one-week repo auctions in August, the central banks approach has effectively been to tweak the cost of funding on a daily basis, modifying the amount of liquidity available to lenders across its various rates.

      Using backdoor channels to contain the currencys weakness, the bank has raised the weighted average cost of funds to 12.52% on Wednesday from as low as 7.34% three months earlier.

      The tightening follows 1,575 basis points of easing in nine consecutive steps until June, which left Turkeys inflation-adjusted borrowing costs among the lowest in the world but helped the government provide support to the $740 billion economy during the pandemic.

      The latest decision suggests the monetary authority is likely to maintain its backdoor policy setup.

      — With assistance by Harumi Ichikura

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