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Turkish central bank tightens policy further with swap rate hike

ISTANBUL, Oct 9 (Reuters) - Turkey’s central bank raised the interest rate in its lira swap operation to 11.75% from 10.25% on Friday, continuing additional tightening steps in the face of a weakening lira after unexpectedly hiking its benchmark interest rate last month.

Following the rate hike in its swap transactions, the lira rebounded to near 7.90 against the U.S. dollar from a record low of 7.9550 earlier in the day. It had eased back to 7.9375 as of 1010 GMT.

Last month, the bank hiked its key policy rate by 200 basis points to 10.25%, having resorted to indirect tightening for weeks to support the lira as it hit all-time lows.

That rate hike lifted the weighted average cost of funding to 11.56% by Thursday from a low of 7.34% in July, when authorities were trying to prevent a sharp economic slowdown due to the coronavirus.

“Swaps get a bigger share in the central bank’s funding composition than repo and other open market transactions. This hike is a reflection of the rising cost of funding in the repo to swap market,” one bank specialist said.

The central bank’s outstanding swap stock stands at about $46.5 billion, corresponding to some 350 billion lira of funding, while the funding provided through repo auctions totals $32 billion.

Friday’s move showed the central bank’s intention to tighten policy, said Enver Erkan, an economist with Tera Yatirim, adding he expected up to a 200 basis point rate hike at the central bank meeting later this month.

“With the constant depreciation of the lira, inflation expectations are going up very rapidly...the central bank should not interrupt the tightening cycle,” Erkan said. (Reporting by Nevzat Devranoglu; Writing by Ezgi Erkoyun; Editing by Daren Butler and Hugh Lawson)