Turkish lira hits record low ahead of central bank rates decision

ISTANBUL: The Turkish lira weakened to a fresh record low against the US dollar on Thursday, as investors cautiously awaited the outcome of a central bank policy meeting, which was expected to leave its key interest rate on hold.

A Reuters poll of 17 economists showed the bank was seen keeping 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.

At 0645 GMT, the lira was at 7.7025 against the dollar after touching an all-time low of 7.7170 earlier in the session. It closed at 7.7030 on Wednesday.

The currency has been among the worst performers this year, weakening 23% on worries about Turkey's depleted forex reserves and sharply negative real interest rates. It has shed half its value in less than three years.

"Today's rates decision will be an important indicator for the lira trend and the central bank's view on economic policies," said a treasury department official at one bank, forecasting rates will remain steady.

"The foreign view is clear. Foreigners are not coming back to Turkey until a lira rates policy that pays a real interest rate is adopted," he said.

"There is a possibility that today's interest rate decision may lead locals more towards foreign currency."

The central bank, which is set to announce its rates decision at 1100 GMT, has held the 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.

Some economists say the bank could lift a secondary rate, the late liquidity window, from 11.25% to create more space for backdoor credit tightening that has lifted the average cost of funding to 10.65%.

The currency found some support as senior European Union diplomats and officials said on Wednesday the bloc was unlikely to follow through on a threat to impose sanctions on Turkey, after Ankara agreed to talks with Greece over maritime claims.