Villagers fix a broken flagpole in Sugedigi village on the Turkish-Syrian border in Hatay province, Turkey January 20, 2018.
(photo credit: REUTERS/OSMAN ORSAL)
ISTANBUL – Turkey’s lira pulled back from a record low of 7.24 to the dollar on Monday after the central bank pledged to provide liquidity and cut reserve requirements for Turkish banks, but its meltdown continued to rattle global markets.
The currency has lost more than 40% against the dollar this year, largely over worries about President Tayyip Erdogan’s influence over the economy, his repeated calls for lower interest rates, and worsening ties with the United States.
On Friday that relentless slide turned into a crash: the lira dropped as much as 18%, hitting US and European stocks as investors took fright over banks’ exposure to Turkey.
The fresh lira collapse on Sunday night hit Asian shares, weakened South Africa’s rand and drove demand in global markets for safe currencies including the dollar, Swiss franc and yen. Shares in Europe’s major banks also lost ground.
The central bank, which surprised markets last month when it left interest rates unchanged despite double-digit inflation and the tumbling lira, announced the moves on liquidity and reserves after Finance Minister Berat Albayrak said authorities would start implementing an economic action plan on Monday.
Bankers also said the central bank would meet banks’ lira liquidity needs at the overnight rate of 19.25% – 150 basis points above the benchmark weekly repo rate – though it might not use the overnight funding on Monday because lira liquidity needs were low.
They said the bank’s decision could be the first step towards tightening policy through the use of an interest rate corridor, an instrument used in previous years, rather than an increase in the benchmark rate.
The bank said it cut the lira reserve requirement ratio, a cash buffer held by banks, by 250 basis points for all maturity brackets and lowered reserve requirement ratios for non-core FX liabilities by 400 bps for maturities up to three years.
The moves will free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system, the bank said. It also pledged to provide “all the liquidity banks need.”
While the measures should ease worries over financial stability, they will have no direct impact on the lira because they do not affect banks’ foreign exchange positions, BNP Paribas strategist Erkin Isik said in a note.
Isik said the lira’s current levels would add between 4 and 5 percentage points to headline inflation in coming months, pushing it up to around 21% in September from nearly 16% last month.
Turkish bank shares fell to their lowest level in dollar terms since November 2003 and their dollar bonds and Turkey’s sovereign dollar debt tumbled. Stocks dropped 4%, with the BIST index of blue-chip stocks down around 50% in dollar terms this year.
In an interview with Hurriyet newspaper, Albayrak described the lira’s weakness as “an attack” – echoing Erdogan, who is his father-in-law.
Erdogan, a self-styled “enemy of interest rates,” wants cheap credit from banks to fuel growth, but investors fear the economy is overheating and could be set for a hard landing.
On Sunday Erdogan said the lira’s free-fall was the result of a plot and did not reflect economic fundamentals.
“What is the reason for all this storm in a tea cup? There is no economic reason... This is called carrying out an operation against Turkey,” he said.
The interior ministry said on Monday it was taking legal action against 346 social media accounts that had posted comments about the weakening of the lira “in a provocative way.”
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