Another day, another rate hike.. but not the “one”

Turkey’s central bank increased its swap rate it offers for lira to 11.75 percent from 10.25 percent following the Turkish lira’s continuing free fall.

The move still is not an outright tightening on its policy rate (of one week repo) but rather hints the central bank plans to further raise average cost of funding for banks.  Hence, the bank now is expected to reduce interbank transaction limits and lower the amount of overnight funding. 

The central bank’s next monetary policy council is on October 22nd.  As the lira keeps on sliding, the expectations for another rate hike is mounting.  Back at its September meeting, defying the expectations the bank had increased the rate by 200 basis points to 10.25 percent; yet with inflation already at 12 percent, the move was not effective.  Since then the bank elevated its funding cost to 11.6 percent as it uses the upper end of its rate corridor for funding, effectively employing a tighter monetary policy.

The Turkish lira dropped to an all-time low of 7.9485 per dollar on Thursday, extending losses this year to about 25 percent. As of Friday, it traded up with quite a low margin compared to its Thursday close.