Turkey's central bank is introducing a new and cheaper liquidity facility for lenders in the latest effort to support the country's battered markets.
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 of 24%, the monetary authority said Monday in a statement on its website.
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 central bank. "This facility will have a limited share within the overall central bank funding," it said.
A downgrade of Turkey's sovereign credit rating by Moody's Investors Service last week risks eroding already shaky confidence in the nation's assets days before a controversial rerun 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 lira.
"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.
Regulators last month ordered Turkey's pension funds to maintain a minimum amount of local stocks and government bonds. Local banks were also asked to bid for more bonds than they needed in their roles as market-makers in debt auctions, according to people familiar with the matter.
The average cost of central bank funding would go down by 10 basis points for every 10% of liquidity extended through the new facility, according to Erkin Isik, senior economist at QNB Finansbank.
"My understanding is that the impact on monetary policy will be very limited," Mr. Isik said. "The main purpose is to support Treasury borrowing."