ANKARA, June 26 (Reuters) – The Turkish lira fell as much as 3 percent to a record low against the dollar on Monday after the central bank took steps to ease policy while an official and bankers said the bank had stopped using its reserves to support for the pound.
The pound weakened to 26.05 against the US currency, surpassing last week’s all-time low of 25.74. It pared its losses to 25.84 by 0945 GMT.
It has fallen 28 percent so far this year, largely after the re-election in late May of President Tayyip Erdogan, who has since abandoned his years of unorthodox economic policies, including cutting interest rates despite rising inflation.
Two big steps have been taken in recent days: The central bank under new governor Hafez Gaye Erkan raised interest rates by 650 basis points to 15% on Thursday, a significant tightening, although it fell short of market expectations.
Then on Sunday, the central bank began rolling back parts of the dozens of rules and regulations it has adopted since 2021 that leave debt, credit and currency markets heavily governed by the state – and which were intended to encourage ownership of the pound.
With the central bank using reserves to protect the value of the pound ahead of the election, reserves fell to an all-time low in early June, with net reserves at minus $5.7 billion. They recovered over the next two weeks.
The easing steps over the weekend were intended to free up markets and provide stability, the central bank said over the weekend, while a senior official said the bank had adjusted its foreign exchange policy.
“The central bank is not intervening in any way at the exchange rate level by selling foreign currency after its interest rate decision last week,” he said.
“The numbers are determined entirely by the free market. Therefore, there is no use of foreign reserves and a period of increasing reserves begins,” he added.
His comments echoed bankers’ view that the central bank had “completely stopped” using its reserves. “The value of the pound is no longer protected by reserves,” said one trader.
“The CBRT (Turkish central bank) seems to have completely given up on using reserves in the foreign exchange market,” said a senior banker, adding that its foreign exchange position was showing increases of $1-2 billion a day.
CENTRAL BANK MEASURES
Under the central bank’s new steps announced over the weekend, the securities maintenance ratio that banks must allocate to their foreign currency deposit was cut to 5% from 10%.
The securities banks must hold range between 3% and 12% of their sterling deposits under the new standard, compared with between 3% and 17% previously.
The new regulation states that banks whose deposits in the pound are less than 57% of total deposits will have to hold an additional seven percentage points of securities, compared to the previous seven additional points applied to banks that hold deposits in the pound below 60%.
“Ratios were slowly cut, allowing banks to adjust their positions slowly and not prompting a quick rise in interest rates, the slight easing of rules will give banks room and time to maneuver about their bond portfolios,” said Enver Erkan, chief economist at Dinamik Yathirim.
“This is a comforting and positive development for the sector.
The Istanbul Stock Exchange’s index of bank shares (.XBANK) rose about 4% after the latest moves, with the main index up more than 2%.
Bankers said that since the easing of measures pushed banks towards sterling deposits, interest rates on deposits at some banks have started to fall from the 40-45% range in a move that is expected to continue.
Additional reporting by Darren Butler and Kanan Sevgili and Ebru Tunkai; Written by Jonathan Spicer; Editing by Emelia Sithole-Matarise
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