The Central Bank of the Republic of Turkey (CBRT) on Friday increased the Turkish lira interest rate for swap transactions by 150 basis points, continuing additional tightening steps after unexpectedly hiking its benchmark interest rate last month.
The lira interest rate, which the bank uses in weekly currency swaps, has been raised to 11.75%, up from 10.25%.
Following the rate hike in the swap transactions, the lira rebounded to nearly 7.90 against the U.S. dollar from a record low of 7.9550 earlier in the day. It had eased back to 7.9375 as of 1010 GMT.
The CBRT last month unexpectedly hiked the benchmark policy rate by 200 basis points to 10.25%, tightening policy for the first time in two years to support the Turkish lira and rein in inflation.
The benchmark one-week repo rate had been held at 8.25% since May – in the middle of Turkey’s coronavirus lockdown – following a nearly yearlong aggressive easing cycle that chopped it down from 24%.
“Swaps get a bigger share in the central bank’s funding composition than repo and other open market transactions. This hike is a reflection of the rising cost of funding in the repo to swap market,” one bank specialist said.
The central bank’s outstanding swap stock stands at about $46.5 billion, corresponding to some TL 350 billion of funding, while the funding provided through repo auctions totals $32 billion.
Friday’s move showed the central bank’s intention to tighten policy, said Enver Erkan, an economist with Tera Yatırım, adding he expected up to a 200 basis point rate hike at the central bank meeting later this month.
“With the depreciation of the lira, inflation expectations are going up very rapidly ... the central bank should not interrupt the tightening cycle,” Erkan said.
Cem Tözge, a strategist at the investment firm Ata Yatırım, said the move could signal a potential increase in the bank's Weighted Average Funding Cost in the coming days.
The bank may limit interbank transactions and reduce the amount of overnight funding, he told Anadolu Agency (AA).