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Turkey’s lira hits new low after bank rules’ rollback

REUTERS/Osman Orsal
The Turkish central bank's net international reserves rose to $35.81 billion in the week to November 24, hitting its highest since March 2020

The Turkish lira slid as much as three percent to a record low against the dollar on Monday, after the central bank took steps to simplify policy, while an official and bankers said the bank had stopped using its reserves to support the lira.

The lira weakened as far as 26.05 against the US currency, surpassing last week’s all-time low of 25.74. It trimmed its losses to 25.84 by 09:45 GMT.

It is down 28 percent so far this year, largely after the re-election in late May of President Tayyip Erdogan who has since moved to backtrack on his years of unorthodox economic policy including slashing rates despite soaring inflation.

Two big steps were taken in recent days: the central bank under new Governor Hafize Gaye Erkan raised rates by 650 basis points to 15 percent on Thursday, a substantial tightening even though it fell short of market expectations.

Then on Sunday, the central bank began rolling back parts of the dozens of rules and regulations it had adopted since 2021 that left debt, credit and forex markets heavily state managed – and that were meant to encourage lira holdings.

With the use of central bank reserves to protect the lira’s value before the election, reserves fell to a historical low in early June, with net reserves at minus $5.7 billion. They recovered in the following two weeks.

The simplification steps at the weekend were meant to free up markets and ensure stability, the central bank said at the weekend, while a senior official said the bank had adjusted its foreign exchange policy.

“The central bank is not intervening in any way on the exchange rate level by selling foreign currency after its interest rate decision last week,” he said.

“The numbers are determined entirely by the free market. Hence, there is no use of foreign exchange reserves and a period of increasing reserves has started,” he added.

His comments echoed the view of bankers that the central bank had “completely stopped” using its reserves. “The value of the lira is no longer being defended by reserves,” said one trader.

“It seems the CBRT (Turkish central bank) seems to have completely abandoned the use of reserves in the forex market,” said a senior banker, adding that its foreign exchange position showed increases of $1-2 billion a day.

Central bank measures

Under new central bank steps announced at the weekend, the securities maintenance ratio that banks are required to allocate to their foreign currency deposit was reduced to five percent from 10 percent.

Securities that banks must maintain ranged between three percent and 12 percent of their lira deposits, under the new standard, compared with between three percent and 17 percent previously.

The new regulation said banks whose lira deposits are less than 57 percent of total deposits will have to hold an additional seven percentage points of securities, compared with the previous seven additional points applied to banks that held less than 60 percent lira deposits.

“Ratios were slowly lowered, allowing banks to adjust their positions slowly and not triggering a rapid rise in interest rates, a slight relaxation of the rules would give banks room and time to manoeuvre about their bond portfolios,” said Enver Erkan, chief economist at Dinamik Yatirim.

“It is a comforting and positive development for the sector.”

The banking stocks index on the Istanbul exchange rose about four percent after the latest moves, with the main index up more than two percent.

Bankers said that after the easing of the measures, which had pushed banks towards lira deposits, deposit rates at some banks had started to fall from the 40-45 percent band in a move that was expected to continue.