Turkish lira pulls back from record low
ISTANBUL/ANKARA Turkey’s lira pulled back from a record low of 7.24 to the dollar yesterday after the central bank pledged to provide liquidity and cut reserve requirements for Turkish banks, but its meltdown continued to rattle global markets.
The currency has lost more than 40 percent against the dollar this year, largely over worries about President Tayyip Erdogan’s influence over the economy, his repeated 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.
The fresh lira collapse on Sunday night hit Asian shares, weakened South Africa’s rand and drove demand in global markets for safe currencies including the dollar, Swiss franc and yen. Shares in Europe’s major banks also lost ground.
The central bank, which surprised markets last month when it left interest rates unchanged despite doubledigit inflation and the tumbling lira, announced the moves on liquidity and reserves after Finance Minister Berat Albayrak said authorities would start implementing an economic action plan on Monday.
Bankers also said the central bank would meet banks’ lira liquidity needs at the overnight rate of 19.25 percent - 150 basis points above the benchmark weekly repo rate - though it might not use the overnight funding on Monday because lira liquidity needs were low.
They said the bank’s decision could be the first step towards tightening policy through the use of an interest rate corridor, an instrument used in previous years, rather than an increase in the benchmark rate.
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 moves will free up 10 billion lira, $6 billion (4.7 billion pounds), and $3 billion (2.4 billion pounds) equivalent of gold liquidity in the financial system, the bank said. It also pledged to provide “all the liquidity banks need”.
While the measures should ease worries over financial stability, they will have no direct impact on the lira because they do not affect banks’ foreign exchange positions, BNP Paribas strategist Erkin Isik said in a note.
Isik said the lira’s current levels would add between 4 and 5 percentage points to headline inflation in coming months, pushing it up to around 21 percent in September from nearly 16 percent last month.
On Sunday night Turkey’s banking watchdog BBDK said it was limiting banks’ foreign exchange swap transactions.