Central Bank acts swiftly to make lira more attractive

ANKARA-Anadolu Agency

The Turkish Central Bank has intervened to stabilize the national currency after the Turkish Lira hit all-time lows against the U.S. dollar.

In a first response to the lira’s falling to 7.30 versus the dollar on Aug. 6, the bank took steps to curb liquidity and make lira investments more attractive.

Liquidity limits offered to primary dealers as part of open market operations will be cut to half of their current limits, the Central Bank announced on Aug. 7.

The new limits will be effective as of next Aug. 10, the bank said in a statement.

Tightening liquidity conditions with the move aims to head off more lira weakness, according to unnamed sources quoted by the state-run Anadolu Agency. 

The Central Bank slashed its one-week repo rate- also known as the bank’s policy rate- to 8.25 percent from 24 percent in less than a year.

However, the bank has in recent days lifted average funding costs from low levels, while the interbank rate also edged higher on Aug. 7. It has also halted repo auctions and told lenders to use a 9.75 percent overnight rate instead.

The lira hit a new record low of 7.36 against dollar on Aug. 7, before recovering to below 7.20 in the afternoon. It is down nearly 19 percent versus the dollar so far this year, despite the greenback’s own weak performance in recent weeks.

Turkey has $105 bln in reserves: Erdoğan

Turkey has some $105 billion in foreign exchange reserves and the Turkish economy is resilient, President Recep Tayyip Erdoğan said on Aug. 7.

“We are much stronger today than yesterday. We will be even stronger tomorrow than today,” Erdoğan told reporters in Istanbul.

He noted that the country’s national income stood at $236 billion in 2002 when the Justice and Development Party (AKP) came to power and the national income rose to $754 billion last year.

The per capital income also increased to $9,127 last year from $3,581 back in 2002, Erdoğan noted.

Turkey will remain on a trajectory where it will boost its economic development, he added.

Erdoğan also said that there are fluctuations in the economy all the time.

“There are always ups and downs in the economy. But I believe that everything will settle down and the Turkish Lira will eventually stabilize,” Erdoğan said.

Turkish Vice President Fuat Oktay also underlined the resilience of the Turkish economy.

“Just to spite interest rate lobbies and those who want to make manipulation over the exchange rates, the wheels of our economy and industry continues to turn during the economy, and they will continue to turn strongly,” he said in a tweet.

Volatile macroeconomic indicators do not reflect the reality of the Turkish economy, the industry and technology minister said on Aug. 7.

“The direction of the Turkish economy is toward production, employment and innovation,” Mustafa Varank said.

Critical banking summit

Late on Aug. 6, Central Bank Governor Murat Uysal met with the Banking Regulation and Supervision Agency (BDDK) head, Mehmet Ali Akben, the Banks Association of Turkey (TBB) chair, Hüseyin Aydın, and officials of several banks.

Uysal told the attendees that banks and regulatory authorities have given a good account of themselves during the coronavirus pandemic, which hit the country mid-March, according to Anadolu Agency.

As part of the government’s Economic Stability Shield package introduced to cushion the fallout from the pandemic, banks supported the economy with credit expansion, he said.

But, at this point, some steps to limit liquidity toward normalization should be taken gradually, said Uysal.

These steps will increase short-term funding costs of banks, he added.

Meanwhile, banking officials said at the meeting that such steps to curb liquidity would lift credit and deposit rates, making lira-dominated investments more attractive. Thus, lira investors would be protected against inflation, which is floating over 11 percent, and they could turn away from foreign currencies, they said.

The total volume of residents’ deposits in foreign currencies reached $212.9 billion in August, marking a 10-percent increase since the start of the year. Foreign currency deposits increased nearly $8.9 billion in the last two weeks, according to the Central Bank figures.

The Central Bank’s gross foreign exchange reserves, in the meantime, decreased $4.2 billion to $46.6 billion in the week ending on July 31.

Rebalancing expected

In the meeting, the Central Bank governor also reiterated that the Central Bank does not have an official exchange rate target under the floating regime, however they would intervene against high volatility.

Some other participants shared their expectations that exchange and interest rates would rebalance soon, stressing that production and exports record strong recovery and current account balance deficit is not that bad despite tourism revenue losses.

All sides emphasized the necessity of solid coordination and close communication, according to separate statements from the BDDK and TBB.

After the meeting, bankers predicted there would be flexibility on asset ratio requirements, sources said.

“These steps in the medium term will play a very important role in achieving stability,” one banker told Reuters after the three-hour meeting. The Central Bank’s next Monetary Policy Committee (MPC) meeting is scheduled for Aug. 20.