Funding cost has been increasing due to the limitation of overnight borrowings of banks and the fact that banks borrow more at late liquidity rates from the CBRT. As of September 22, the weighted average funding cost has reached 10.6%. With an increase of 320 basis points since July, the funding cost is at a 6-month high.
Due to the depreciation of the TRY towards record low levels and the increasing range of upward deviation of inflation from expectations at double-digit rates, we can expect the Central Bank to consider tightening options in the upcoming meetings if it does not make a change in this meeting. It may be possible for the Central Bank to evaluate options such as increasing the interest rate or technically raising the interest corridor and LLW in terms of exchange rate movement in the following months.
At this stage, we see that the monetary policies implemented in the recent past are using the LLW or the overnight lending rate as the main funding rate and the use of the effective interest corridor. The transition to such unconventional monetary policy practices will also be a return from the simplification of the monetary policy adopted in recent years. However, since the current side-way monetary policy tightening and the opening of the gap between the policy rate and the main funding rate, the policy rate is not the reference level in terms of funding, the complex monetary policy phase is started. The main function of the interest rate corridor is to allow the Central Bank to show flexibility in terms of adapting quickly to changing funding conditions. The Central Bank may direct funding to different bands of the interest rate corridor, depending on the new conditions. Currently, this corridor is set symmetrically 150 basis points above and below the policy rate, and the Central Bank has not made any guidance that it can make the corridor asymmetrical. Funding went beyond the corridor, reaching the range of the overnight lending rate and late liquidity window. If the Central Bank will raise an interest rate in the future, it seems more likely to do this through the LLW and the corridor at first.
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