Turkey’s central bank squeezed some credit channels and signaled on Friday it would do more backdoor policy tightening to arrest a record drop in the lira, as data showed Turks snapped up more foreign currencies than ever before, according to Reuters.
Two weeks of volatile selling have left Turkey’s currency down nearly 20 percent against the dollar this year, among the worst performers in emerging markets, and exposed the limits of Ankara’s costly interventions in the foreign exchange markets.
Ratings agencies told Reuters Turkey may well have to formally tighten monetary policy — despite political opposition — to head off bigger economic problems, especially after locals added $9 billion in hard currencies in two weeks.
The lira fell 2.4 percent on Thursday and slid another 1.9 percent to an all time intraday low of 7.365 versus the dollar on Friday before bouncing back.
The central bank has turned to backdoor policy levers and in recent days lifted average funding costs from low levels, while the interbank rate also edged higher on Friday. It has also halted repo auctions and told lenders to use a 9.75 percent overnight rate instead.
However a formal policy tightening may be some way off after an aggressive year-long easing cycle bought the benchmark rate to 8.25 percent.
President Recep Tayyip Erdoğan, who opposes high rates and sacked the last central bank chief for ignoring instructions, said Friday the volatility is temporary and the economy’s main problem is fallout from the coronavirus pandemic.
His vice president said Turkey will overcome the “interest rate lobby” and FX “manipulation.”
After a meeting with Turkish Central Bank Governor Murat Uysal late on Thursday, bank executives came away with the impression that planned policy steps will lift backdoor rates to stabilize things, even if the lira remains volatile, six sources told Reuters.
At the three-hour meeting, which included regulators, the bank clearly said funding costs will be increased but did not give a number, said the sources familiar with the call.
Bankers predicted backdoor tools to be used to effectively tighten policy by up to 300 basis points, and that there would be flexibility on asset ratio requirements. The average funding rate was 7.88 percent, up from 7.34 percent in mid-July after it cut sharply to limit coronavirus fallout.
“After the steps taken the lira’s loss in value may continue for a while longer, but these steps in the medium term will play a very important role in achieving stability,” said one banker, adding that the call was “positive.”
Raising the stakes for Turkey, foreign currencies held by locals swelled to $213 billion at the end of July, continuing a trend of dollarization, official data showed.
Central bank data also showed its FX buffer declined in the last week with gross reserves down by nearly half so far this year at $47 billion, its lowest in years.
Data and traders’ calculations show the central bank and state banks have sold some $110 billion since last year to underpin the lira. Interventions have picked up in recent weeks though it was uncertain whether the lira’s recent drop reflected a policy change, analysts said.
Analysts have said Turkey is running out of options to address low reserves and persistently high inflation and imports.