Turkish Central Bank fights to arrest lira’s fall

Turkish Central Bank fights to arrest lira’s fall

Turkish Central Bank fights to arrest lira’s fall

AFP photo

The Central Bank has responded to the Turkish Lira’s historic plunge by cutting forex required reserves, in a move adding $1.5 billion in liquidity to the financial system, vowing additional steps if necessary. 

The statement helped stem some of the lira’s losses, although analysts said more must follow to back the struggling currency.

The lira plunged to record-low levels against both the U.S. dollar and the euro early on Jan. 10, as the greenback continued to rise in global markets and various domestic political and economic concerns put the lira under pressure.

Earlier on Jan. 10, the lira hit a historic low of 3.80 against the dollar and 4.0 against the euro, which is again a first for the currency. 

The Turkish currency later eased to 3.75 to the dollar and 3.97 to the euro.

The steep losses in the lira have increased concerns regarding the private sector’s huge forex-based debts, which have recently soared, according to official data.

“Instead of tightening monetary policy directly, the [Central] Bank prefers to tighten TL liquidity conditions and ease FX liquidity conditions, which might be perceived as a smoothening step, but might not reverse the actual course,” said BGC Partners chief economist Özgür Altuğ, as quoted by Reuters on Jan. 10.

The Central Bank, which left rates on hold last month, is expected to come under fresh pressure from financial markets to raise them when it meets on Jan. 24.

The chief economy adviser to Turkish President Recep Tayyip Erdoğan, Cemil Ertem, told Anadolu Agency that there was a campaign underway to depreciate the lira in a rapid manner.

“The forex demand is very shallow, highly speculative and originates from abroad. This is happening when the Turkish parliament has started to debate the constitutional amendment. We have seen a campaign in a bid to depreciate the lira in a rapid manner. This is not a conspiracy theory; but an obvious fact,” he said.

Ertem also said one of the main reasons why the markets were shallow was the inability to do accomplish the required tasks in the capital and money markets, claiming that Turkey was unable to achieve its goals in these fields because of interventions by the Gülen movement and its staffing policies in key economic and financial institutions.

Amid escalating domestic political and economic uncertainties, the lira started the week with a loss in value after it lost around 3.2 percent last week. The currency is already under big pressure, mainly due to reports that Fitch could cut the country’s credit rating in its assessment on Jan. 27 as well as rising political concerns, which have heightened with the launch of parliamentary talks on contentious constitutional amendments that started on Jan. 9.

“The lira continues to experience new record lows against the dollar and the euro in a week, when the global data calendar is quite eased. The Turkish currency has been negatively differentiated from almost all emerging currencies after Donald Trump was elected the U.S. president. At this point, we can say that the constitutional talks and several concerns over the Turkish Central Bank’s monetary policy have increased the pressure on the Turkish currency,” said XTB Menkul Değerler Research Director Arzu Toktay.

Key ‘structural advantage’ for lira

JCR Eurasia Rating President Orhan Ökmen said such perceptions about the Central Bank must be halted immediately.

“The lira has been the worst performing emerging currency mainly due to the inefficiencies in the monetary policy and the rising political risks,” he said in a statement, as quoted by Reuters.

“In addition to these concerns about monetary policy, the uncertainties in almost all spheres of Turkish politics, the extension of the state of emergency and its negative ramifications over the economic climate, and the ongoing geopolitical and security concerns, have created a strong downward impact over the lira against the dollar,” he added.

Ökmen said the losses in the lira could be reversed by the realization of some of the Central Bank’s moves, key macro-prudential measures and easing in domestic politics, describing this as “a crucial structural advantage for the lira.”