ISTANBUL: Turkey’s central bank suggested yesterday that more surprises lay ahead in its unorthodox efforts to manage a weakening lira, pressured by concerns over the future of US stimulus, war in Syria and the country’s current account gap.
In a presentation on its website accompanying a closed-door meeting with economists, the bank said it would start using gross forex reserves — as well as the net reserves it has employed until now — to manage forex liquidity.
That could mean lowering forex reserve requirements for lenders, thereby boosting dollar liquidity and supporting the lira without adding to the $8bn of net reserves it has already whittled away at forex auctions this year.
The lira hit a record low of 2.07 against the dollar a week ago, down around 15 percent from its February peak, after central bank Governor Erdem Basci ruled out interest rate hikes to defend it.
That surprise announcement left economists wondering how the bank would support the currency in the face of fears about an imminent tapering in US stimulus, the conflict in Syria, and Turkey’s gaping current account deficit.
Its gross reserves include dollars kept at the central bank by lenders and the Treasury. Reducing forex reserve requirements would cut those gross reserves and leave more dollars in the market, easing pressure on the lira.
The bank could also reduce the “reserve option coefficients” it uses to determine how much lenders must pay if they choose to hold a portion of their lira required reserves in forex or gold, again potentially increasing dollar liquidity.
“We will most likely see lower reserve option coefficients and reserve requirements on forex liabilities,” said Burcu Unuvar, a senior economist at Is Investment, adding not everyone at the meeting was convinced the strategy would be enough.
In a rare interview with the state-run Anadolu news agency (www.aafinans.com) last week, Basci forecast the lira would recover by the end of the year to around 1.92 to the dollar, but gave little indication of how it would get there.
Economists said central bank officials at yesterday’s meeting — who included two members of its rate-setting policy committee and its chief economist but not Basci himself — appeared to retreat from that year-end forecast.
“They seem very, very reluctant to raise rates,” said Standard Bank’s head of emerging market research Timothy Ash.
“So the mix now is basically fixed/anchored policy rates, and a willingness to live with a weaker currency,” he said in an email from the meeting, which is a regular monthly event.
In one of the world’s most complex monetary policy mixes, the bank has been using required reserves and other macro prudential tools, as well as weekly repo rates and overnight borrowing and lending rates to manage liquidity conditions.
Highly respected for his prodigious command of academic theory, Basci sees himself as a maverick central banker free to experiment with policy tools often untested by more orthodox peers, those who have worked closely with him say.
Reuters
