Turkish lira banknotes sit in this arranged photograph at a currency exchange in Istanbul, Turkey. (Photographer: Kostas Tsironis/Bloomberg)

Turkey Brings Back Interbank Borrowing Limit as Stress Eases

(Bloomberg) -- Turkey’s central bank reintroduced borrowing limits for overnight transactions at its interbank money market, effectively tightening liquidity after a two-week period of unrestricted funding that aimed to contain stress from the nation’s currency crisis.

The central bank said Wednesday that “recent evaluations” prompted the move to reintroduce an overnight borrowing limit, which will be set at 44 billion liras ($6.9 billion). That’s still a looser limit for Turkey’s embattled banks than the 22-billion-lira threshold in force before Aug. 13, when the unrestricted funding was announced as part of a swath of steps announced amid a plunge in the lira.

The move is “an attempt to normalize, given that risks of a bank run are moderating,” said Tim Ash, senior emerging-market sovereign strategist at Bluebay Asset Management LLP in London. “But the central bank is still doubling the liquidity as per what was being offered before Aug. 13.”

That date marked the worst of the lira’s plunge, when it had lost almost a quarter of its value against the dollar in three trading days. After stabilizing for two weeks, the currency is moving toward that record low again. The lira dropped another 1.6 percent to 6.3763 per dollar as of 11:48 a.m. local time on Wednesday, the biggest decline among more than 140 currencies tracked by Bloomberg.

Repo Measures

The central bank’s latest move shows Turkey continuing to do “anything but what they actually need to do," Bluebay’s Ash said. “They need to a) raise policy rates, in a credible, orthodox, plain-vanilla way; b) go to the IMF; c) normalize relations with the U.S.”

The lira has dropped 41 percent against the dollar this year, matching the Argentine peso as the world’s worst-performing currency. The losses in August were triggered by U.S. sanctions on two Turkish ministers over the detention of an American pastor and they accelerated when U.S. President Donald Trump imposed tariffs on some of the nation’s imports. That exacerbated existing concern about President Recep Tayyip Erdogan’s unconventional economic views and opposition to interest-rate increases.

The central bank’s rate-setting committee will meet next on Sept. 13. The benchmark one-week repo rate is at 17.75 percent, but the central bank has been withholding repo funding, pushing the effective interest rate 150 basis points higher, to 19.25 percent. It could theoretically push the rate up by another 150 basis points to 20.75 percent, without a formal rate increase, by pushing banks to use its highest funding rate, the late liquidity window.

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