Record skid in Turkish lira raises stakes for central bank

Adds background, analyst comment

ISTANBUL, Sept 22 (Reuters) - Turkey's lira continued its descent into record low territory on Tuesday, as investors weighed whether the central bank could buck expectations and hike rates at its meeting this week to stem the decline.

The lira TRYTOM=D3has fallen 14 of the last 16 days and stood at 7.648 against the dollar at 0657 GMT, its weakest level on record, after closing at 7.6365 on Monday. It is down 22% this year, among the world's worst performers.

While most economists in a Reuters poll did not expect the central bank to formally hike its policy rate this week, they predicted it would continue backdoor steps to tighten money supply.

Several analysts expect it to lift the top limit of its interest rate corridor, the late liquidity window rate, which now stands at 11.25%.

But such tinkering will only delay an inevitable formal policy tightening, said Piotr Matys, senior emerging markets strategist at Rabobank.

"To improve its credibility the CBRT would have to show a very strong commitment to do whatever is necessary to support the lira in order to reduce the risk to inflation and financial stability," he said.

While the policy rate TRINT=ECI stands at 8.25%, backdoor steps have raised the average funding cost CBTWACF= to 10.61% as of Monday, from a low of 7.34% in July.

The lira came under new pressure in late July in part because aggressive monetary easing over the last year left real rates deeply negative. Matys added that a stable currency could convince foreign firms to move production from Asia to Turkey, which is much closer to European customers.

The bank is reluctant to restrict growth just as the economy is recovering from a nearly 10% contraction in the second quarter due to the pandemic. It also expects inflation to dip, although price rises have remained stuck in double-digits.

Analysts say the bank is also under political pressure not to hike rates.

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(Reporting by Ali Kucukgocmen; Editing by Ece Toksabay and Jonathan Spicer)

((ali.kucukgocmen@thomsonreuters.com , @alikucukgocmen; +902123507067; Reuters Messaging: Reuters Messaging: ali.kucukgocmen.thomsonreuters.com@reuters.net))

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