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Turkey introduces cheaper liquidity facility

Turkey’s central bank has moved to provide cheaper funding for banks that buy government bonds, in an effort to shore up the country’s battered markets.

In a statement published at the start of this week on its website, the Central Bank of Turkey (CBRT) announced that it had decided to provide primary dealer banks with a liquidity facility within the framework of open market operations.

The monetary authority added that the interest rate on the new facility, which will be used through overnight repo transactions within predetermined limits, will be set at 100 basis points below the central bank’s benchmark - the one-week repo rate – of 24%.

The limits will be determined by taking into account the amount of government domestic debt securities purchased by primary dealer banks through Treasury auctions, according to the CBRT. “This facility will have a limited share within the overall central bank funding,” it said.

Sovereign credit downgrade

Turkey’s sovereign credit rating was downgraded last week by the credit ratings agency (CRA) Moody’s Investors Service. The move that could further erode already shaky confidence in the nation’s assets days before this Sunday’s controversial re-run[GB1]  of Istanbul elections.

Authorities have adopted increasingly interventionist policies in the face of an exodus of foreign capital that’s driving up yields on government bonds and piled pressure on the Turkish lira (TRY). The currency has weakened further on fears that US president Donald Trump may impose economic sanctions on Turkey as punishment for the country’s purchase of S-400 aire defence missiles from Russia.

“This measure was taken because the Treasury thinks foreign investor interest in auctions will be subdued after the latest Moody’s downgrade,” said Onur Ilgen, Istanbul-based treasury manager at MUFG Bank Turkey AS, told the Bloomberg news service.

Regulators last month ordered Turkey’s pension funds to maintain a minimum amount of local stocks and government bonds. Reports suggested that local banks were also asked to bid for more bonds than they needed in their roles as market makers in debt auctions.

Bloomberg quoted Erkin Isik, senior economist at QNB Finansbank, who said that the average cost of central bank funding would go down by 10 basis points for every 10% of liquidity extended through the new facility.

“My understanding is that the impact on monetary policy will be very limited,” Isik said. “The main purpose is to support Treasury borrowing.”

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