Turkey's central bank moved to buttress the battered Turkish lira (TRY) on May 7 with the currency having lately fallen to a series of record lows against the dollar. The regulator lowered the upper limit for foreign exchange which banks can use for their reserve requirements.
The lira, down 11% against the dollar this year, trimmed its losses after the announcement. It gained to levels around 4.25 from a morning low of 4.2715, but slipped back to 4.2666 by 18:25 Istanbul time. The latest all-time low of 4.2901 came on May 4, leading to more pressure for an emergency rate hike.
A multitude of domestic and international economic negatives, including anxieties about the central bank’s inability to get a grip on sticky double-digit inflation amid Turkey's credit-fuelled and overheating economy, have caused investors to dump the lira. Addressing the devaluation has become a sensitive issue with snap elections called for June 24.
“The upper limit for the FX maintenance facility within the reserve options mechanism has been lowered to 45% from 55%,” the central bank said.
In all, around TRY6.4bn of liquidity will be withdrawn from the market and approximately $2.2bn of liquidity will be provided to banks, it added.
Muammer Komurcuoglu of Is Invest told Reuters he saw the move as a step towards decreasing lira depreciation. “We think that the central bank is trying to buy time until the next rate setting meeting on June 7. We don’t think the move will have a significant, lasting impact on the market,” he said.
The reserve options mechanism allows banks to maintain a certain ratio of their TRY reserve requirements in foreign exchange and/or gold.
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