Turkey has once again raised the cost of borrowing by the back door as the lira sinks towards the threshold of 8 to the dollar.

The lira has dropped 25 per cent this year and is already at record lows. but after the exchange rate ended the day at tl7.94 against the buck on thursday, the countrys central bank on friday raised the cost of borrowing lira through foreign-currency swap transactions, making it more expensive for commercial banks to switch dollars into lira.

Turkeys central bank has traditionally been reluctant to raise its benchmark interest rate, reflecting an aversion to the step from president recep tayyip erdogan despite annual inflation running at 11.75 per cent. the 1.5 percentage point increase in the interest rate on the swap facility which now stands at 11.75 per cent provided an instant but modest 0.4 per cent boost to the lira, leaving the exchange rate at tl7.9350 by midday in london.

Two weeks ago, the central bank surprised markets with an unexpected decision to raise its benchmark interest rate by 2 percentage points. but analysts and investors doubt that the latest move will offer the currency meaningful longer-term support.

[authorities] are very worried about the lira, said paul mcnamara, an emerging markets portfolio manager at gam. its finally beginning to register that they need to [further] tighten liquidity.

Mr mcnamara said that move would help the currency at the margin but added: what theyve done so far certainly isnt sufficient. it doesnt seem likely to me that thats going to work.

The latest inflation-stoking fall in the lira is fuelled in part by geopolitical tensions, which have exacerbated investors broader concerns about the countrys economic policy settings.

Ankara has vociferously backed azerbaijan after a resurgence of fighting in the caucasus region of nagorno-karabakh, where azeri troops are battling russia-backed armenian forces.

Meanwhile, the us state department this week voiced concerns about reports that turkey, a nato member, planned to test an s-400 air defence system that it bought from moscow, raising renewed fears that washington could impose sanctions on turkey.

The central bank has been deploying unorthodox tools in recent weeks to lend at a rate higher than the official benchmark level of 10.25 per cent.

By encouraging banks to borrow in unconventional ways including through the overnight lending facility the average cost of funding provided by the central bank had risen to 11.6 per cent on thursday, its highest level since january.

Many analysts are sceptical that it will be enough. the central banks tightening steps are very slow, said one london-based analyst, who did not wish to be named. with this pace of tightening, we might still see the lira cross 8.

A collapse in tourism during the pandemic has contributed to turkeys substantial current account deficit. a lack of foreign capital inflows has forced the central bank to spend its reserves to plug the gap.

Writing before fridays move by the central bank, per hammarlund, strategist at seb, said the slide in the lira was merely an acceleration of an already existing trend driven by an unsustainable economic policy mix.

He added: the key unknown is where the pain threshold is for the turkish central bank.