News / Economy

Turkey Central Bank Starts ‘Strong’ Tightening to Bolster Lira

People line in front of automated teller machines in Hatay, Turkey, May 17, 2013.
People line in front of automated teller machines in Hatay, Turkey, May 17, 2013.
Reuters
 Turkey's central bank auctioned a record $1.5 billion in foreign exchange on Monday, tightening policy to defend a lira that had hit all-time lows against the dollar.

The lira has lost as much as 6 percent of its value against the dollar since late May, when unprecedented protests broke out against Prime Minister Tayyip Erdogan. Demonstrations centered on the commercial capital Istanbul compounded investor concerns about the U.S. Federal Reserve scaling back stimulus measures.

On Monday, the lira touched a new all-time low of 1.9737 against the U.S. currency. It rebounded to 1.9480 by 1151 GMT after the bank held five forex-selling auctions.

The total volume of $1.5 billion was the highest amount the bank has ever sold via forex auctions in a day, sending a strong signal to the market. The previous high was $750 million in 2011. The bank sold $350 million in six auctions on June 20.

Emerging currencies have plunged to multi-year or even record lows against the resurgent dollar. That is forcing many central banks to rally to their defense on fears currency weakness will lead to a wholesale exodus of foreign capital from domestic capital markets.

“From today a strong additional monetary tightening practice will be started,” the Turkish central bank statement said, delivering what it described as a message from Governor Erdem Basci. Tightening would be “strong, effective, temporary.”

“The central bank thinks as loan growth remains strong, there is no need to change the interest rate band yet, while additional tightening as implemented occasionally since 11 June and forex sales will be adequate to fight against volatility,” said Sengul Dagdeviren, senior vice president at ING Bank.

“Until [the] ... 23 July policy meeting, the central bank is most likely to continue aggressive forex sales to the extent lira's relative volatility against peers remains high while keeping cost of average open market operation funding in the range of 5 percent-6 percent.”

Protests against Erdogan, seen by critics as increasingly authoritarian, spread across Turkey last month after police cracked down on a small demonstration against an Istanbul building project.

Erdogan has used a huge parliamentary majority and strong popular support in the last 10 years to introduce social reforms, including the curbing of an army that had topped four governments in 40 years, and stimulate the economy with market-  and business-friendly policies.

But for the first time, during last month's turmoil, frictions arose publicly with parts of the business community. Erdogan  unsettled markets further by accusing an “interest rate lobby” of conspiring with foreign forces to undermine Turkey.

The protests eased in the middle of the month, but police used water cannon and tear gas again at the weekend to disperse a protest in central Istanbul.

The central bank has been holding forex auctions since June 11 to support the weakening lira. It has sold a total $4.15 billion.

“I guess the central bank had to respond, eventually, to record lows for the lira against the dollar and signs that more was to come,” said Standard Bank emerging market research head Timothy Ash.

“So by indicating further tightening ahead the central bank is in effect going to try and slow domestic demand to narrow the current account deficit - as it did in early 2012.”

Faster output

At a meeting with economists on Monday, Basci gave the message that its additional tightening steps were aimed more at limiting loan growth than supporting the lira, bankers at the meeting told Reuters.

The governor also said that a change in the bank's interest rate corridor would only be implemented if the liquidity tightening fails to prevent excessive loan growth, bankers said.

In a written overview of its presentation to economists, the bank said this will not only contain rapid credit growth through the liquidity channel but also will support the value of the lira.

Growth slowed sharply to 2.2 percent last year and the central bank has been trying to spur the economy since mid-2012 with a series of rate cuts.

Data on Monday showed the economy remained sluggish, with industrial production up just 1 percent year-on-year in May.

Economy Minister Zafer Caglayan responded by saying Turkey needed faster output growth to meet its 4 percent economic growth target in its medium term economic program, given uncertainties in the global outlook.

Analysts said the pressure on the central bank to hike rates at its next policy meeting on July 23 was increasing.

“The central bank will pause weekly repo auctions and start aggressive forex selling auctions from today,” said Ali Cakiroglu, a strategist at HSBC Asset Management.

“The bank will have to raise the upper band of its interest rate corridor in its next meeting considering the pressure on the currency.”

In its last policy meeting the bank kept its main one-week repo rate at 4.50 percent, its borrowing rate at 3.5 percent and its overnight lending rate at 6.5 percent.

The bank said the composition of the liquidity it provides will continue to be gradually shifted from net foreign assets to net domestic assets until its next monetary policy committee meeting.

You May Like

Polls Open in Scotland Independence Vote

As race to persuade undecided voters continues, 'No' voters say they believe life in Scotland will slowly improve, 'Yes' vote not worth the risk More

South Africa’s 'Open Mosque' Admits Everyone, Including Critics

Open Mosque founder plans to welcome gay worshipers and allow women to lead prayers More

Ukrainian Activist in Despair About Future of Her Country

IrIna Dovgan, accused of being a spy and tortured by pro-Russian separatists, is appealing to UN Human Rights Council to support her country More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
A Dinosaur Fit for Land and Wateri
X
September 17, 2014 8:44 PM
Residents and tourists in Washington D.C. can now examine a life-size replica of an unusual dinosaur that lived almost a hundred million years ago in northern Africa. Scientists say studying the behemoth named Spinosaurus helps them better understand how some prehistoric animals adapted to life on land and in water. The Spinosaurus replica is on display at the National Geographic museum. VOA’s George Putic has more.
Video

Video A Dinosaur Fit for Land and Water

Residents and tourists in Washington D.C. can now examine a life-size replica of an unusual dinosaur that lived almost a hundred million years ago in northern Africa. Scientists say studying the behemoth named Spinosaurus helps them better understand how some prehistoric animals adapted to life on land and in water. The Spinosaurus replica is on display at the National Geographic museum. VOA’s George Putic has more.
Video

Video Iraqi Kurdistan Church Helps Christian Children Cope find shelter in churches in the Kurdish capital, Irbil

In the past six weeks, tens of thousands of Iraqi Christians have been forced to flee their homes by Islamic State militants and find shelter in churches in the Kurdish capital, Irbil. Despite U.S. airstrikes in the region, the prospect of people returning home is still very low and concerns are starting to grow over the impact this is having on the displaced youth. Sebastian Meyer reports from Irbil on how one church is coping.
Video

Video NASA Picks Boeing, SpaceX to Carry Astronauts Into Space

The U.S. space agency, NASA, has chosen Boeing and SpaceX companies to build the next generation of spacecraft that will carry U.S. astronauts to the International Space Station by the year 2017. The deal with private industry enables NASA to end its dependence on Russia to send space crews into low Earth orbit and back. Zlatica Hoke has more.
Video

Video Future of Ukrainian Former President's Estate Uncertain

More than six months after Ukraine's former President Viktor Yanukovych fled revolution to Russia, authorities have yet to gain control of his palatial estate. Protesters occupy the grounds and opened it to tourists but they are also refusing to turn it over to the state. VOA's Daniel Schearf reports from Mezhigirya, just north of Kyiv.
Video

Video China Muslims Work to Change Perceptions After Knife Attacks

China says its has sentenced three men to death and one woman to life in prison for a deadly knife attack in March that left more than 30 dead and 140 injured. Beijing says Muslim militants from China's restive western region of Xinjiang carried out the attacks. Now, more than six months after the incident, residents in the city are still coping with the aftermath. VOA's Bill Ide has more from Kunming.
Video

Video Enviropreneur Seeks to Save the Environment, Empower the Community

Lorna Rutto, a former banker, is now an ‘enviropreneur’ - turning plastic waste into furniture and fences discusses the challenges she faces in Africa with raw materials and the environment.
Video

Video West Trades Accusations Over Ransoms

As world leaders try to forge a common response to the threat posed by Islamic State militants in Iraq and Syria, there is simmering tension over differing policies on paying ransoms. In the past month, the jihadist group has beheaded two Americans and one Briton. Both countries refuse to pay ransom money. As Henry Ridgwell reports for VOA from London, there is uncertainty in the approach of some other European nations.
Video

Video Scotland Independence Bid Stokes Global Interest

The people of Scotland are preparing to vote on whether to become independent and break away from the rest of Britain, in a referendum being watched carefully in many other countries. Some see it as a risky experiment; while others hope a successful vote for independence might energize their own separatist demands. Foreign immigrants to Scotland have a front row seat for the vote. VOA’s Henry Ridgwell spoke to some of them in Edinburgh.


Carnage and mayhem are part of daily life in northern Nigeria, the result of a terror campaign by the Islamist group Boko Haram. Fears are growing that Nigeria’s government may not know how to counter it, and may be making things worse. More

AppleAndroid

World Currencies

EUR
USD
0.7718
JPY
USD
107.32
GBP
USD
0.6125
CAD
USD
1.0974
INR
USD
60.919

Rates may not be current.