CBT hikes late liquidity window by 50 bps, keeps key interest rate on hold

The Central Bank of Turkey surprisingly raised its late liquidity window lending rate today by 50 basis points to 12.25 percent. Almost all of this will feed through to the average interest rate that banks pay for central bank funding, noted Nordea Bank in a research report. However, it kept the key interest rate on hold. The CBT is not providing any liquidity at the repo rate and only about 10 percent of the banks’ funding need at the normal overnight lending rate. Therefore, the remaining central bank funding comes from the late liquidity window, suggesting that it is the important interest rate for market rates and, in turn for the Turkish lira, stated Nordea Bank.

The hike today was in the low end of expectations, but the Turkish lira appreciated immediately amid most other emerging market currencies being in red today. This shows that interest rates are high enough or that the Turkish central bank has sufficient room to move in order to curtail inflation. It also indicates that political risks stay high, but no longer give the markets enough impulse to push the lira weaker in the medium term, noted Nordea Bank.

“We still believe the TRY will gradually strengthen from here with the year-end forecast for EUR/TRY at 3.60”, added Nordea Bank.