Turkey Dusts Off Lira Playbook as Banks Pressed Before Elections
(Bloomberg) — Turkey’s central bank is tightening its grip on the weakening lira before this month’s local elections, resorting to administrative measures as well as calls to commercial lenders aimed at capping hard-currency purchases.
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The monetary authority imposed restrictions on lira-denominated loan growth on Tuesday and sold $475 million in lira-settled foreign-currency forwards, the first time it’s carried out such a transaction since July. The decisions come during one of the worst stints for the lira in months, as rising inflation and falling foreign currency reserves undermine sentiment.
What Bloomberg Economics Says…
The total impact of the central bank’s new steps, aimed at damping credit growth, could be equivalent to the policy rate being tightened by 230 basis points. In effect, that would be as if the key rate was raised to 47.3% from 45% for lenders.
— Selva Bahar Baziki, economist. Click here to read more.
The central bank also phoned commercial lenders, reimposing limits on the amount of foreign currency they could purchase in the interbank market, and asking them to avoid forward contracts with a tenure of less than three months, according to people with knowledge of the matter, who asked not to be identified discussing the issue.
The verbal warning was the first since President Recep Tayyip Erdogan’s reelection last year, when the monetary authority intervened in lenders’ foreign-currency activities on a nearly daily basis, according to the people. The central bank didn’t reply to a request for comment on Wednesday.
The moves come as Erdogan and his allies seek to win back power from the opposition in big cities in this month’s ballot, raising concern over the potential fallout from more lira weakness. While flagged by the monetary authority, the decisions fly in the face of past policy changes aimed at introducing more orthodoxy in Turkey, namely by hoisting interest rates.
“Although the central bank measures will limit loan supply in the short term, they don’t eliminate the need for monetary policy tightening,” QNB Finansbank Chief Economist Erkin Isik said. “In order to reduce loan growth efficiently in line with targets and limit speculative FX demand, we think there should be rate hikes.”
The lira weakened as much as 0.4% to a record low of 31.7826 against the dollar in Istanbul. It has lost 1.2% over the last three days and 1.4% last week — the worst weekly performance since July.
A higher-than-expected inflation print published on Monday led to calls for higher rates while increasing demand for hard currencies, which Turks prefer to protect their savings. A $20 billion drop in the country’s net foreign assets over the first two months of 2024 has also hit the lira.
Read More: Turkish Rate Hike Drumbeat Gets Louder as Inflation Heads to 70%
In a sign of further stress in the currency market, the spread between the interbank and spot lira markets has widened — which usually happens during periods of rising demand for physical dollars by Turkish residents. The lira is at around 32.4200 against the dollar in the spot market of the Grand Bazaar in Istanbul, according to websites of exchange bureaus.
–With assistance from Beril Akman.
(Adds BI analyst comment in third paragraph, updates market data)
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