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By Nevzat Devranoglu

ANKARA Aug 13 (Reuters) - Turkey's central bank will meet banks' lira liquidity needs at a higher cost than its benchmark policy rate, four bankers with knowledge of the matter said on Monday -- a possible step towards tightening monetary policy using an interest rate corridor rather than a rate hike.


The central bank was ready to provide lira liquidity to banks if needed at an overnight rate of 19.25 pct -- 150 basis points higher than the weekly repo rate -- bankers told Reuters after the bank did not hold its regular repo auction on Monday.

The bank decided not to fund at that rate due to unhealthy price formations and excessive fluctuations in the market and it was unlikely to open its regular repo auction in the coming days until such movements in the market eased, bankers said.

"The central bank interpreted the market volatility as unhealthy price movements and has made room for itself to possibly return to its previous corridor policy," a foreign exchange trader at a Turkish bank said.

The central bank previously used a more complex monetary policy set and adjusted interest rates through a corridor, instead of using its benchmark rate.

It has faced political pressure from President Tayyip Erdogan, who has repeatedly called for lower interest rates to fuel growth despite soaring inflation, a plunge in the lira to record lows and worries the economy is overheating.

The bank later moved to simplify its monetary policy tools and in May announced that process was complete and that the one-week repo rate would be its policy rate.


Bankers said it was too early to say for sure that the bank had reverted to using an interest rate corridor.

"The liquidity needs for today is only a few billion lira ... So we can't say, only based on today, that the central bank has shifted to its old corridor policy ... We will see if that is the case by Friday," said the foreign exchange trader.

The lira has lost more than 40 percent against the dollar this year, largely on worries about Erdogan's influence over the economy, his calls for lower interest rates, and worsening ties with the United States.

On Friday that relentless slide turned into a crash: the lira dropped as much as 18 percent, hitting U.S. and European stocks as investors took fright over banks' exposure to Turkey. It hit a new low on Monday of 7.24 per dollar.

Investors have been seeking an outright hike in the policy rate to halt the currency's losses but the bankers say that readopting the corridor could substitute for higher rates.

"If the bank continues to not open weekly repo in the coming days, this could be interpreted as tightening and a covert rate hike," another banker said.


The central bank surprised markets last month when it left interest rates unchanged despite double-digit inflation and the tumbling lira. It announced Monday's moves on liquidity and reserves after Finance Minister Berat Albayrak said authorities would start implementing an economic action plan.

The bank said it cut the lira reserve requirement ratio, a cash buffer held by banks, by 250 basis points for all maturity brackets and lowered reserve requirement ratios for non-core FX liabilities by 400 bps for maturities up to three years.

"The central bank's liquidity moves are very flexible and appropriate," Ugur Gurses, a former Treasury official and finance commentator, wrote on Twitter.

"It provides both forex and lira liquidity. Albeit temporary, it also involves a small rate hike too effectively," he said.

(Additional reporting by Behiye Selin Taner Writing by Humeyra Pamuk Editing by Daren Butler and Catherine Evans)