* Interbank rate edges higher on Friday
* Analysts say more policy tightening on the cards
By Nevzat Devranoglu, Orhan Coskun and Ebru Tuncay
ANKARA/ISTANBUL, Aug 7 (Reuters) - Turkey’s central bank tightened some credit channels on Friday as the lira plumbed new lows and sources said the authorities had signalled that more such backdoor policy steps would be taken to curb a selloff that began two weeks ago.
The currency is down nearly 20% versus the dollar this year, among the worst performers in emerging markets, even though the greenback itself has sagged. The lira fell 2.4% on Thursday and another 1.6% on Friday by 0955 GMT.
The skid has revealed the limits of Ankara’s costly interventions in the foreign exchange market and analysts say the central bank may be forced to buck political pressure and raise its policy rate from 8.25%.
While a formal monetary tightening may be some way off, the bank has in recent days lifted average funding costs from low levels, while the interbank rate also edged higher on Friday. It has also halted repo auctions and told lenders to use a 9.75% overnight rate instead.
After a meeting with Central Bank Governor Murat Uysal late on Thursday, bank executives came away with the impression that planned policy steps will lift rates to stabilise things, even if the lira remains volatile, six sources told Reuters.
At the three-hour meeting, which included regulators, the bank clearly said funding costs will be increased but did not give a number, said the sources, who were either on the call or familiar with it.
“After the steps taken the lira’s loss in value may continue for a while longer, but these steps in the medium term will play a very important role in achieving stability,” said one banker, adding that the call was “positive”.
The central bank declined to comment on the call.
Analysts have warned that Turkey was running out of options to address persistently high inflation and imports, as well as badly depleted foreign currency reserves at a central bank stretched by the response to the coronavirus pandemic.
Data and traders’ calculations show the central bank and state banks have sold some $110 billion since last year to underpin the lira. Interventions has picked up in recent weeks though it was uncertain whether the lira’s recent drop reflected a policy change, analysts said.
After the meeting, bankers predicted there would be flexibility on asset ratio requirements, sources said.
They also expected backdoor tools to be used to effectively tighten policy by up to 300 basis points - even while the one-week repo policy rate remains at 8.25% after an aggressive year-long cycle of monetary easing.
President Tayyip Erdogan has repeated his preference for low rates and sacked the last central bank governor for not following instructions. The current governor has said policy is in line with inflation forecasts.
“As we have seen several times in the past, the central bank is looking to change its funding composition and increase lira costs rather than hiking rates,” an asset and liability management banker said.
The average rate of funding has risen to 7.88% in recent days, up from 7.34% in mid-July. It was cut sharply in March to limit the coronavirus fallout but the central bank said the support would be phased out early this month.
Goldman Sachs analysts said it the bank would likely lift the average funding rate as high as the policy rate, adding it could also raise the 9.75% overnight rate and even lift a late lending rate from 11.25%.
In a separate statement on Friday, the central bank said it will halve the current liquidity limits offered to primary dealers under open market operations as of Monday.
(Additional reporting by Ezgi Erkoyun and Ali Kucukgocmen; Writing by Jonathan Spicer; Editing by Daren Butler and David Clarke)