Turkish central bank to hold key rate, continue backdoor tightening

ISTANBUL: Turkey's central bank is seen keeping its policy rate on hold next week despite the lira hitting record lows, but is expected to drive funding costs higher with more back-door measures, a Reuters poll showed on Friday.

The median estimate in a Reuters poll of 17 economists was for the central bank to keep its one-week repo rate steady at 8.25%. Three economists expected a rate hike with the estimates ranging between 100 basis points and 150 basis points.

The central bank has held its one-week repo rate steady at 8.25% at its last three meetings, following a nearly year-long easing cycle that saw the policy rate cut aggressively from 24%.

Instead of a formal hike, the central bank has resorted to back-door methods to tighten policy, using liquidity measures and directing lenders to borrow at a higher rate. Analysts say the bank is under political pressure not to hike rates.

Four former Turkish Central Bank policymakers, including a governor, have told Reuters the bank should set aside such back-door policy tools and use next week's meeting to formally raise the benchmark policy rate.

The bank's weighted average cost of funding rose to 10.41% as of Thursday, due to back-door liquidity measures, from a low of 7.34% on July 16.

The median estimate for the weighted average cost of funding at end-September was 10.70%. The forecasts of the 12 economists who responded to the question ranged between 10.5% and 12.25%.

Negative yields due to high inflation, concerns over the central bank's depleted forex reserves and tensions with the European Union over the east Mediterrenean have hit the lira.

Seven economists estimated that the bank will keep its policy rate unchanged until year-end, while six forecast hikes. Estimates for the hike ranged between 25 basis points to 8.5% and 375 basis points to 12%.

The median for the weighted average cost of funding at year-end was 12%, with forecasts ranging between 11% and 13.25%.

The central bank is scheduled to announce its rate decision on Sept. 24 at 1100 GMT.