Turkish state-run banks have sold nearly $1 billion in foreign currency to prop up the lira, Bloomberg reported on Monday, after a recent statement from the central bank governor saying there will be no intervention in currency markets.
The state banks entered the foreign exchange market to bolster the lira, which was spiraling after last week’s public holidays. Traders said these efforts appeared to target preventing the lira from declining much beyond 26.07 to the dollar, according to Bloomberg.
The move came after Turkish Central Bank Governor Hafize Gaye Erkan’s recent pledge to prioritize fighting inflation over direct exchange rate control. Governor Erkan, in her first meeting with bankers, emphasized that the central bank’s first and primary priority will be price stability and battling the near-40 percent inflation, according to the Turkish news website Ekonomim.
She also voiced her dissatisfaction with the immediate turn to foreign currency purchases by banks following the central bank’s decision to hike the main interest rate by 650 basis points to 15 percent, Ekonomim reported. Erkan suggested that banks should have shown their support for the lira by gradually testing the market instead of reacting precipitously following the interest rate decision.
Governor Erkan’s approach marks a significant departure from previous policy, where the central bank’s decisions were partly influenced by election concerns and a less strict focus on inflation targeting. She also declared that the sale of reserves, which was primarily aimed at keeping exchange rates low, has ended, according to the Gercek news website.
While the state banks’ interventions have provided temporary relief for the lira, experts such as Piotr Matys, a senior currency analyst at In Touch Capital Markets Ltd., believe that the new economic team needs to impress foreign investors with swift implementation of structural reforms for the lira to stabilize and appreciate, according to Bloomberg.
The lira’s year-to-date losses now stand at 28 percent, the biggest loss among peers after the Argentinian peso. Further insights into Governor Erkan’s strategy for combating inflation and her stance on monetary policy are expected at the presentation of the third inflation report of the year in İstanbul on July 27.