Lira Recovers on Central Bank Help

Turkish lira retreats from rock bottom levels after the central bank pledged liquidity support and other help.

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Turkey’s lira retreated from a record low of 7.24 to the dollar on Monday after the central bank promised to provide liquidity and slash reserve requirements for Turkish banks.  However, its meltdown continued to rattle global markets.

The Turkish lira has lost more than 40 percent of its value against the dollar this year, mostly over worries about President Tayyip Erdogan’s influence over the economy, his repeated calls for lower interest rates, and unhealthy ties with the United States.

Last Friday, the currency’s deep plunged turned into a free-fall, with the lira dropping as much as 18 percent, sapping US and European stocks as investors became jittery over banks’ exposure to Turkey.

The fresh lira crash on Sunday night hit Asian shares and weakened South Africa’s rand and drove demand in global markets for safe currencies, which include the dollar, Swiss franc, and yen.  Shares in the European banking sector were also disrupted, losing much ground.

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The central bank surprised markets last month when it left interest rates unchanged despite the double-digit inflation and the struggling lira.  It announced moves on liquidity and reserves after Finance Minister Berat Albayrak said that authorities would begin rolling out an economic action plan on Monday.

Bankers also stated that the central bank would meet banks’ lira liquidity needs at the overnight rate of 19.25 percent, which is 150 basis points above the benchmark weekly repo rate.  However, it might not use the overnight funding on Monday because lira liquidity needs were low.

They said that bank’s move could be the first step toward a tightening policy through the use of an interest rate corridor, which is an instrument used in previous years, instead of an increase in the benchmark rate.

The bank also said that it could cut the lira reserve requirement ratio, which is a cash buffer held by banks, by 250 basis points for all kinds of maturity brackets.  It also lowered reserve requirement ratios for non-core FX liabilities by 400 bps for maturities up to three years.

The moves will be able to free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system, according to the bank, adding that it pledged to provide “all the liquidity banks needs.”

The measures should manage to ease worries over financial stability, but they will have no direct impact on the lira since they do not affect banks’ foreign exchange positions, said BNP Paribas strategist Erkin Isik in a note.

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