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Turkish lira slides again as funding costs edge higher

The blue-chip BIST 100 index rebounded 0.68%, while the banking index was up 0.39% at 0737 GMT.

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Turkey’s lira weakened again on Monday after touching a record low last week, falling 0.8% against the dollar as the central bank continued to raise some borrowing costs via backdoor channels to stabilize volatile foreign exchange.

The average cost of funding rose to 8.08% from 7.88% last week and 7.34% in mid-July. Even as expectations rose for a formal interest rate hike to halt the selloff, Turkish authorities signaled late last week they would for now focus on other tools.

The lira, which fell seven of the last 10 trading days, stood at 7.34 against the dollar at 0802 GMT. It hit a historic intraday low of 7.3650 on Friday and is among the worst performers in emerging markets this year, down 19%.

The economy is expected to shrink this year due to coronavirus fallout and data showed the labor participation rate has fallen sharply. Further lira depreciation could drive up inflation and deepen the contraction.

Turkey’s central bank has moved in recent days to tweak market funding so that credit is a bit tighter – without lifting its benchmark policy rate from 8.25%, where it stands after a year of aggressive monetary easing.

The bank has kept repo auctions shut and directed firms to use an overnight lending window for funding that sits 150 basis points above the policy rate. The bank regulator on Monday eased some asset-ratio requirements.

A forex trader said the top question is whether the central bank will raise funding costs as high as a late liquidity window set at 11.25%. “We think the use of that rate could completely halt the depreciation of the lira,” he said.

The blue-chip BIST 100 index rebounded 0.68%, while the banking index was up 0.39% at 0737 GMT.

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