An assortment of Turkish Lira banknotes in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Turkish Central Bank Rolls Out Backdoor Tightening to Boost Lira

(Bloomberg) -- Turkey’s central bank stepped in to tighten the supply of liras on Thursday by raising borrowing costs for lenders and making a series of changes to reserve requirements in an attempt to bolster the country’s battered currency.

The regulator is ceasing to provide liquidity at its cheapest rate of 24 percent by suspending one-week repo auctions, a decision it attributed to volatility in financial markets. The move effectively raises the cost of funding by 150 basis points without an official increase in the benchmark interest rate.

In a separate statement, it lowered the amount of foreign currency commercial lenders are required to park at the regulator as part of their mandatory lira reserves, which will soak up 7.2 billion liras ($1.2 billion) from the system. At the same time, the monetary authority increased reserve requirements for foreign-currency liabilities by 100 basis points.

Overall, the changes will withdraw a combined $200 million of foreign-exchange liquidity from the market, according to the statement.

Turkish Central Bank Rolls Out Backdoor Tightening to Boost Lira

The lira, already among the worst-performing currencies in emerging markets this year, has come under renewed pressure this week amid fears of an erosion in Turkey’s democracy following a ruling party challenge to elections and concern over the central bank’s commitment to raising rates if needed to curb inflation. The regulator has used fringe tools to bolster the currency in the past, most recently in March when it suspended repo auctions for two weeks.

The backdoor rate hike “is an attempt to slow down the rapid ascent of the dollar-lira pair,” said Piotr Matys, a London-based analyst at Rabobank. “But it will not change the underlying upside bias supported mostly by domestic factors -- mainly political risk -- with additional support coming from the negative external backdrop.”

The lira briefly trimmed losses after the central bank announced the suspension of its one-week repo auctions but was trading 0.9 percent weaker at 6.2386 per dollar as of 4:50 p.m. in Istanbul.

What Bloomberg’s Economists Say

“The tightening of monetary policy through the suspension of the one-week repo auction is unlikely to stem the decline in the lira -- the problems today are more political than economic. And low interest rates on bank deposits limit the effectiveness of any hikes by the central bank.”

--Ziad Daoud, Mideast economist
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The central bank’s next monetary policy meeting is scheduled for June 12, shortly before a rerun of municipal elections in Istanbul, after authorities annulled the March 31 vote where the opposition won the mayor’s seat for the first time in 25 years.

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