18 January 2017•Update: 19 January 2017
By Fatih Erkan Dogan
ANKARA
Economists have praised the Central Bank’s move to introduce foreign exchange deposits against the local currency under a swap mechanism to deal with volatility in the Turkish lira’s value.
The lira has lost 20 percent of its value against the greenback since November last year.
The swap mechanism, in which the banks lend liras to the Central Bank while borrowing dollars to pay at a due date with predetermined interest rate, is expected to cut down the lira's liquidity and boost the Turkish currency as the cost of borrowing from banks in the local currency increases.
On Tuesday, the Central Bank announced it will utilize foreign exchange deposits under the local currency swap mechanism to increase flexibility and diversity of the Turkish lira and foreign exchange liquidity management.
Ziraat Bank’s economist Bora Tamer Yılmaz said: “We think positive effects of the new practice may be reflected on the sharp volatility recently seen in the lira and the approach of the Central Bank may benefit the real sector to better manage their FX [foreign exchange] exposure, whether within or off their balance sheet”.
Burak Kanli, an economist with FinansInvest, said the new swap mechanism would contribute towards making the lira more stable and less fickle but warned it might not be enough to permanently calm down volatility.
“Turkey is one of the countries with the highest financing needs. And there is a need for a real interest rate to attract capital flows. Our inflation is over 8 percent in the last three years."
“I think it will not change in 2017 because, I believe, it is hard to permanently stabilize lira without introducing rate hikes” Kanli said.
On Jan. 10, the Central Bank cut the foreign exchange reserve requirement ratios for banks by 50 basis points to boost liquidity in the financial sectors to up to $1.5 billion, as the U.S. dollar/Turkish lira exchange rate surged to 3.7410 at the close of markets on Jan. 9.
The bank also said market developments were being closely monitored, and further steps would be taken, if necessary, to safeguard price and financial stability in the country.
The bank on the same day reduced borrowing limits of banks from interbank markets to 22 billion Turkish liras ($5.8 billion), aiming to raise the cost of buying the lira.
The lira hit a new low against the dollar on Wednesday afternoon despite the Central Bank's liquidity move a day earlier.
The U.S. dollar against the Turkish lira rose to a new historic high of 3.9415 just minutes before the close of the markets after starting the day at around 3.8220.
But the greenback fell sharply against the lira on Thursday following the Central Bank’s announcement that it would not hold its usual weekly repo auction, effectively boosting the value of lira against other currencies by cutting the amount of lira circulating in markets.
The move directed domestic banks to use “Late Liquidity Window” for their lira needs, an instrument which offers lira with 10 percent interest rate, significantly higher than one-week repo interest rate of 8 percent.
The Central Bank’s announcement turned upside down the recent trend in the exchange rate, tumbling below 3.80 levels from 3.94 levels in late trading hours of Wednesday.
Analysts said the bank had succeeded in helping the lira by cutting the amount of lira circulating in Turkish markets. “The Central Bank’s move, which increases the cost of funding, is positive for the lira,” Enver Erkan, an economist from Kapital FX, said.
On Jan. 13, the Central Bank cut the borrowing limit of banks from Interbank Money Market to 11 billion liras (approx. $2.9 billion) in its bid to support the lira – this was the second reduction in the same instrument; it was cut to 22 billion liras on Jan. 10.
Apart from all these measures the bank kept a tight stance on lira liquidity since Jan. 12 by suspending one-week repo auctions - in which local banks borrow lira from the Central Bank -- for a fifth trading day, aiming to stem the sharp decline in the value of the lira against other currencies.
