Turkish interest rates may rise gradually to 11.75 percent – strategist

Interest rates in Turkey may increase gradually towards 11.75 percent as the central bank tightens monetary policy, said Nick Stadtmiller, a director of emerging markets strategy at Medley Global Advisors.

Turkey’s central bank increased its benchmark interest rate by 2 percentage points to 10.25 percent last week, but monetary policymakers are making use of a so-called interest rate corridor that allows them to fund the nation’s banks at rates as high as 13.25 percent.

The central bank has provided 175 billion liras ($22.3 billion) from total funding of 240 billion liras since mid-August via repurchasing operations, Stadtmiller said In comments on Twitter late on Monday. Those papers will mature at a rate of about 50 billion liras per week, meaning the mix of new funds will be important in determining interest rates going forward, he said.

The bank only offered 5 billion liras to banks at its benchmark rate on Friday and nothing on Monday, suggesting that monetary policymakers are leaning towards providing capital via an overnight interest rate facility at 11.75 percent, according to Stadtmiller.

Such a policy would gradually increase the weighted average cost of funding for banks to 11.75 percent from 10.99 percent currently, he said. Average interest rates could rise further should the central bank decide to open funding at its late liquidity window rate of 13.25 percent, he said.

Investors in Turkey are wondering whether last week’s hike to the benchmark rate will translate into higher overall interest costs for banks, citing the central bank’s interest rate corridor. That uncertainty has increased selling pressure on the lira. The central bank had been lending at an average rate of 10.6 percent prior to the hike.

The lira fell to a record low of 7.8486 per dollar on Tuesday. It traded down 0.5 percent at 7.8430 per dollar in mid-morning trading in Istanbul.

Inflation in Turkey stood at 11.8 percent in August, meaning real interest rates remain in negative territory.