Turkeys Swap Move May Signal New Rate Hike This Month

People walk past a screen showing rates at a currency exchange agency in Istanbul, on Sept. 24.

Turkeys central bank raised the cost of currency swaps it does with local lenders, signaling to some analysts it will increase the benchmark rate at its meeting later this month.

The bank raised the lira rate on dollar swaps by 150 basis points to 11.75% on Friday. The increase on the cost of swaps that account for more than half of total funding came as the lira slumped past 7.90 per dollar this week, a record low. The currency, which has lost a quarter of its value this year, reversed declines after the news to trade 0.1% higher at 7.9338 per dollar at 11:41 a.m. in Istanbul.

The move effectively raised the central banks cheapest funding rate, which will potentially pressure banks to increase their lira deposit and lending rates. It could also lead to higher offshore swap rates.

“The weighted average cost of funding may rise past 12% until the next meeting,” said Onur Ilgen, an Istanbul-based treasury manager at MUFG Bank Turkey AS. “If there is no clear recovery trend in the lira, we believe a 200-basis-point hike may be delivered at the next meeting on Oct. 22.”

The one-week repo rate, raised to 10.25% last month, has for weeks been a benchmark in name only as policy makers used other funding channels to raise the cost of money and try to contain the liras weakness. Tightening by stealth pushed up the average cost of cash provided by the central bank to 11.56% on Thursday from as low as 7.34% in July.

“It is encouraging that the CBRT is more proactive as today‘s decision is essentially an emergency rate hike,” said Piotr Matys, a London-based strategist at Rabobank. The move signals a rate hike at the central bank’s next meeting, he said.

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The lira, however, may not be in the clear even if the central bank delivers an outright rate increase on Oct. 22.

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“The bullish bias in USD/TRY remains underpinned by factors which are unlikely to vanish,” said Matys. “Those include prevailing geopolitical tensions fueled by various conflicts Turkey is involved in and the risk that the U.S. may impose sanctions over the S-400 missile defense system.”

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— With assistance by Kerim Karakaya