By Ezgi Erkoyun and Jonathan Spicer
ISTANBUL, Sept 23 (Reuters) - Turkey's currency continued its gradual descent to record lows on Wednesday, reflecting expectations the central bank would not hike rates to stem the slide as tensions with Greece and the threat of new EU sanctions appeared to ease.
Concerns over Turkey's depleted FX reserves and sharply negative real interest rates have left the lira TRYTOM=D3 among the world's worst performers this year, down 22%.
At nearly 7.7 versus the dollar, it has shed half its value in less than three years. The decline began when a currency crisis in 2018 set off a sharp recession that put an end to several boom years under President Tayyip Erdogan.
This year's coronavirus pandemic shrank the economy for the second time in as many years, leaving the central bank reluctant to remove monetary stimulus amid the recovery, especially given pressure from Erdogan for cheap credit.
Unlike the burst of selling in 2018, the lira in recent months has slowly burrowed to all-time lows, including passing 9 versus the euro this week. It has dropped 15 of the last 17 sessions and was at 7.684 against the dollar at 0839 GMT.
The slide continued despite a Greek-Turkish deal to resume talks over competing claims to Mediterranean waters, a dispute that has raised the prospects of harsher European Union sanctions on Ankara.
HIGH STAKES DECISION
Economists polled by Reuters expect the central bank to hold its policy rate steady at 8.25% at a meeting on Thursday. The one-week repo rate TRINT=ECI has held there since May after nearly a year of aggressive rate cuts.
But economists also expect the bank will lift a secondary rate, the late liquidity window, from 11.25% to create more space for backdoor credit tightening that has lifted the average cost of funding CBTWACF= to 10.61%.
"Clearly the market wants to see the bank making efforts to turn the negative real interest rates back into positive rates with the help of key rate hikes," said Antje Praefcke at Commerzbank, adding there is risk of a sudden selloff.
Though the central bank expects inflation to dip, price rises have remained in double-digits, leaving real rates negative for lira depositors. In turn, Turks have ramped up FX and gold holdings to nearly $220 billion.
In part due to costly state interventions to slow the lira's slide, gross FX reserves at the central bank have fallen by nearly half this year. Moody's and other analysts say that raises the risk of a balance-of-payments crisis.
(For a graphic of rates and inflation, click here: https://tmsnrt.rs/2FFpAsD)
Rate cuts left inflation lofty in Turkey https://tmsnrt.rs/32y4RA3
How Turkey's former central bankers would dodge a crisis
(Editing by Subhranshu Sahu)
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