June 17, 2019 / 10:25 AM / a month ago

UPDATE 2-Turkish central bank extends cheaper liquidity to primary dealers

(Adds additional economist comment)

ISTANBUL, June 17 (Reuters) - Turkey’s central bank said on Monday it will extend a liquidity facility to primary-dealer banks with an interest rate set at 23%, below its 24% policy rate, a move expected to lower the average cost of funding.

The facility would be limited in part by domestic government debt purchased by the banks through Treasury auctions, it said.

The move appeared to hint at a reversal after a series of unorthodox efforts by the central bank and state banks in the face of a renewed lira selloff since March. Last year, Turkey’s economy tipped into recession after a full-blown currency crisis.

The central bank said the infusion would contribute to “the deepening of financial markets and the effectiveness of monetary policy.”

Last week, the bank left its policy rate on hold and in a statement highlighted the improvement in inflation. According to a Reuters poll, economists predict a formal policy easing as soon as July.

The lira stood at 5.8795 against the dollar at 1023 GMT, slightly firmer than Friday’s close of 5.8910. The lira did not substantially move after the liquidity step.

The effect and size of the new liquidity facility will need to be observed to predict the outcome, said Inan Demir, senior emerging market economist at Nomura, adding that the move would lower average cost of funding for the banking sector.

“The main objective is to facilitate higher demand and participation in the new government domestic issuances,” Demir said. “It is going to lead to easier domestic monetary conditions, because the average funding costs will come down – but how much, we will have to see.”

The facility will be used through overnight repo transactions, and will have a limited share within the overall central bank funding, the central bank said.

“We can look at the central bank move as a way to support treasury auctions and easing of cost of funding rather than an interest rate cut,” a banker said.

“It seems to be easing by the backdoor,” Guillaume Tresca, Senior EM Strategist at Credit Agricole, said on Twitter after the move. “It is not a full rate cut but it looks like a rate cut. Again, it is not good in terms of credibility in Turkey.” (Reporting by Ezgi Erkoyun and Ebru Tuncay; Additional reporting by Karin Strohecker in London Editing by Jonathan Spicer)

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