ISTANBUL, Jan 18 (Reuters) - Turkey’s lira weakened against the dollar on Wednesday as the central bank’s push to shore up the currency through swap auctions failed to deliver a recovery that analysts say likely requires an aggressive rate hike.
The central bank has rolled out a series of measures since last week - culminating in the introduction of forex swap auctions on Wednesday - in an effort to support a currency that has fallen as much as 10 percent this year, on top of a double-digit slide in 2016.
Some economists and traders have referred to the central bank’s recent moves as “covert tightening” - defending the currency without an outright rate hike - but say more decisive action is needed to calm the market.
“We believe conventional hikes need to be delivered soon, and the communication would need to be unambiguous,” analysts at UBS wrote in a note this week. “Aggressive action in the near term would help address concerns that the central bank prioritises growth over inflation.”
The lira has taken a drubbing from deepening security fears and concern that President Tayyip Erdogan’s opposition to higher rates has kept the central bank from tightening. Erdogan, an economic populist who wants cheaper credit to bolster the economy, says the bank is independent.
Investors are not so sure. A Reuters poll of 33 economists on Wednesday showed Turkey’s economic growth is expected to fall well short of government targets in the three years to 2018, reflecting concern about the lira and worries about the fallout from a failed coup in July.
The spectre of inflation is adding to the pain. It could reach double digits for the first time in almost five years in the first quarter, two senior economy officials told Reuters this week.
The currency was at 3.7808 to the dollar at 1424 GMT, some 0.5 percent weaker than at Tuesday’s close. The central bank said it allocated $500 million in a forex deposit auction on Wednesday, after receiving bids of $611 million.
The central bank said on Tuesday it would introduce the auction, which bankers have said is effectively a form of swap transaction aimed at bolstering the lira.
It has also effectively shut off two of its lira funding taps for the past three days, bankers have said, in a bid to push lenders to borrow at a higher rate - a form of defending the currency without an outright rate hike. (Reporting by David Dolan; Editing by Mark Trevelyan)