Turkey Lira Woes Ease as Central Bank Pushes Funding Cost Higher

Mint

29-04-2025

(Bloomberg) -- The pressure on Turkey's lira is showing early signs of easing, with the central bank pushing ahead with more aggressive tightening to provide a buffer from domestic political and global trade risks.
The weighted average cost of funding from the central bank rose to its highest level this year — 48.8% as of Monday — according to the latest data compiled by Bloomberg. That's even higher than the benchmark interest rate of 46% and indicates that policymakers want to keep a tighter stance to counter demand for dollars.
The central bank pushes the average funding cost above the benchmark rate by witholding funding at the one-week repo rate, forcing banks to access more costly funding from the higher overnight rate.
The adjustment in funding channels shows that the central bank remains cautious against dollar demand after a volatile period for markets in March, when the detention of Istanbul Mayor Ekrem Imamoglu spurred a rapid exit from lira-denominated assets. The higher cost of central bank funding encourages local banks to raise the deposit rates they offer customers and keep savers invested in the local currency.
'Conditions of today require our central bank to largely manage the exchange rate,' Finance Minister Mehmet Simsek said in an interview with Bloomberg Haberturk TV on Tuesday. 'The central bank took the right measures' by vacuuming up lira liquidity and tightening financial conditions to ensure disinflation, he said.
The Turkish lira was little changed at 38.42 per US dollar as of 11:00 a.m. Istanbul after weakening 1.1% last week.
The central bank's foreign-currency sales totaled about $3.4 billion last week, down from $4.3 billion the prior week, according to estimates from Erkin Isik, QNB Turkey's chief economist in Ankara. 'While there's some slowdown, especially compared to the heights of the market rout,' some demand for the greenback remains, he said.
The stability of the lira, a pillar of the central bank's disinflation program, faced severe pressure in the wake of Imamoglu's jailing last month, prompting an emergency interest-rate hike from the central bank as well as the expenditure of billions of dollars from reserves to defend the exchange rate.
The interventions cost an estimated $53 billion as of April 25, according to Bloomberg Economics, with US President Donald Trump's tariff plans aggravating the fallout. Imamoglu is seen as President Recep Tayyip Erdogan's most formidable political rival.
Gross FX reserves dropped by $3.7 billion in the week through April 18. The central bank collects hard currency from exporters as well as through exporter loan payments that help balance its reserves. The amount it generates from exporters' FX sales isn't publicly disclosed.
Another surprise interest-rate increase this month, combined with a pledge from officials to maintain tight monetary policy, are helping assuage some investor concerns. Morgan Stanley earlier this month said it was 'cautiously' re-entering the Turkish lira carry trade.
'Demand for foreign currency has started to show signs of easing along with the central bank's further tightening,' said Onur Ilgen, head of treasury at MUFG Bank in Istanbul. Meanwhile, rising costs for hedging and forward contracts are also denting demand from corporates. 'That may help keep the currency under control,' Ilgen said.
The lira's forward implied one-month and three-month yields — indicators of the currency's offshore funding costs — both rose to nearly 48% on Tuesday, slightly higher than levels seen last week.
'While there's a nascent slowdown in FX demand, there's still lack of lira demand from foreigners that could ensure relief in the Turkish lira,' Ilgen said.
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First Published: 29 Apr 2025, 03:23 PM IST