An attempt by Turkey’s central bank to halt the slide in the lira by bolstering the banking sector failed as the currency plunged further to a record low, leaving it nursing a one-day fall of 3 per cent on Monday.
Shrinking confidence in the Turkish economy and investor worries at the inaction of the CBRT, Turkey’s central bank, had already caused the lira to fall 2.2 per cent on Monday, when policymakers announced adjustments to reserve policies.
In a statement, the central bank said the move would provide the banking sector with $2.2bn in liquidity. The CBRT said it would accomplish this by cutting the “upper limit for the FX maintenance facility within the reserve options mechanism” by 5 percentage points to 40 per cent.
But after initially recovering, the lira resumed its fall and was trading at TL5.2310, a drop of 11 per cent since June 25 when Recep Tayyip Erdogan was declared winner of the presidential election.
The result bolstered Mr Erdogan grip on power but left investors uneasy. Markets have become worried over sanctions imposed by the US related to Turkey’s detainment of an American pastor held on espionage charges, the president’s choice of his son-in-law to lead the finance ministry, and growing economic imbalances within the country.
Lutz Karpowitz, an analyst at Commerzbank, said the CBRT move, following its July 24 meeting when it passed up the chance to raise rates, was being seen as a dovish signal and was likely to trigger further pressure on the lira.
The CBRT was worried about lira weakness, said Mr Karpowitz, but its limited actions showed it was “not willing to upset its political leaders who are demanding lower interest rates”.
Cristian Maggio at TD Securities described the CBRT’s action as a one-off injection of dollar liquidity but said this would need to be followed by further reductions in the reserve options mechanism “and/or monetary tightening” if the lira was going to strengthen.
With inflation running at almost 16 per cent and the lira having plummeted 28 per cent this year, economists have said further action needs to be taken in order to slow the rapid growth in prices.
Get alerts on Currencies when a new story is published