(Bloomberg) -- The market will need to wait another day to know if Turkey’s surprise interest-rate increase will achieve the intended effect.
The key one-week repo rate the central bank raised to 10.25% on Thursday 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 lira’s weakness.
More than a month of such tightening by stealth has pushed up the average cost of cash provided by the central bank to 10.69% on Thursday from as low as 7.34% in July. It’s been higher than Turkey’s new benchmark level since Sept. 11.
Should the central bank stop funding lenders from its more costly tools on Friday and provide all of the necessary liquidity through its one-week repo window instead, the rate hike could therefore effectively morph into a cut. The bank’s funding choices in the days ahead will determine how much tightening -- if any -- it will deliver to the economy.
Since a new round of currency depreciation started last month, the monetary authority has been modifying the amount of liquidity available to lenders across its various rates.
If policy makers restart the benchmark one-week repo auctions in the days ahead, the weighted average cost of funding could even start dropping from current levels, marking a reversal in tightening measures.
“It all depends on the day-to-day funding conditions that they will implement going forward,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. “Even if it is a case of real tightening, how long will it last for? We have no guarantee that the Turkish central bank won’t start reverting to repo funding as soon as the lira enters a more stable path toward appreciation.”