Turkey’s central bank sells foreign exchange reserves to stem lira crash | Business and Economy News

Turkey’s central bank sold its declining foreign exchange reserves for the first time in seven years to shore up the lira.

Through Bloomberg

Turkey’s central bank has fought to support the plummeting pound, intervening directly in currency markets for the first time in seven years.

The central bank sold foreign currencies, including the U.S. dollar, to combat “unhealthy price formations” in the market, according to a statement, which did not provide specific numbers. People familiar with the matter estimate sales at around $1 billion.

The lira initially surged after the news, climbing as high as 8.5% against the dollar, only to pare back gains later in the session.

The monetary authority’s surprise decision to sell from its dwindling asset pool shows that policymakers are worried about the currency’s free fall. The big question remains: how much longer can Turkey count on its reserves to support a plummeting currency?

Yet, despite dismal opinion polls and growing discontent, President Recep Tayyip Erdogan has continued to press his demands for lower borrowing costs. The central bank “can make the necessary intervention if necessary,” Erdogan told reporters in Ankara on Wednesday.

The pound has lost more than 30% against the dollar since Turkey began cutting interest rates in September, plunging the country deeper into economic crisis.

The main difference in Turkey’s announcement today is that the intervention came directly from the central bank, not from public lenders, which have frequently taken covert action to support the lira.

The billions spent trying to prop up the lira – some $165 billion as of 2018 – have become a political flashpoint in the country grappling with the fallout from Erdogan’s erratic policies, rapid inflation and an unstable economy. .

This “reflects the seriousness of the situation,” said Piotr Matys, analyst at InTouch Capital. “But that may not be enough. Turkey does not have sufficient foreign exchange reserves to regularly sell a substantial amount of dollars.

Overview of Turkey’s foreign exchange reserves:

  • Gross reserves stand at $129 billion, including $61 billion from the bank’s swap deals, according to the latest data released Nov. 19.
  • When swaps and other liabilities such as reserve requirements are removed, Turkey’s net reserves stand at minus $35 billion.

The bank has repeatedly emphasized the importance of its gross reserves, the total amount available to it at the time, instead of net reserves which remain in negative territory. He previously said net reserves would be misleading for valuations.

On Tuesday, Erdogan pledged to continue lowering interest rates until the 2023 election. He promised the country would no longer try to attract ‘hot money’ by offering high interest rates and a strong lira. In his policy view, cheaper money will boost manufacturing and create jobs while inflation will eventually stabilize.

The last intervention was in January 2014, when the central bank sold $3.1 billion in spot markets. The move failed to stabilize the lira and less than a week later Turkey was forced to more than double its benchmark interest rate to 10% in an emergency meeting.

The country faces a very different set of circumstances now. Governor Sahap Kavcioglu is the fourth central bank chief since Erdogan was sworn in with expanded executive powers in 2018, which included the ability to fire and replace bank governors.

(Adds information on the lira and the economy of Turkey.)

-With the help of Srinivasan Sivabalan and Asli Kandemir.

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