Turkish Lira recovers amid daily tightening, forex support

ISTANBUL - Reuters

The Turkish Lira recovered Dec. 17 after the Central Bank reassured the market that monetary tightening would continue until inflation improves.

The currency hit record lows on Dec. 16 due to an emerging market sell-off and domestic political tensions.

Central Bank Governor Erdem Başçı said yesterday that the Bank would keep its monetary policy tight until there was a clear improvement in the inflation outlook.

The Bank sets interest rates monthly, but is able to tweak the average cost of funding for banks through daily repo auctions, and foreign-exchange auctions can help impact the exchange rate.

The average cost of funding (CBTWACF=) rose to 8.85 percent on Dec. 16 from 8.79 percent the day before, owing to daily tightening from the Central Bank.

But analysts warned that the Bank’s pledge on Dec. 16 to meet some of the foreign exchange needs of state energy importers may not be effective in the medium term.

“[If] deterioration in global risk appetite continues and leaves the lira exposed to further depreciation, this action would be rather ineffective,” a note from Finansbank said.

It added that the Bank was expected to raise the amounts of daily forex sales and push up overnight interbank rates to defend the currency.

Markets eyed the U.S. Federal Reserve’s last policy meeting of the year with expectations that the rate-setting committee of the world’s biggest economy would drop a commitment to keeping rates low for a “considerable period” and possibly raise the interest rate by mid-2015.