Central Bank steps in to calm volatility in markets this week
ISTANBUL
The Turkish Central Bank has announced a raft of measures this week amid volatility in the FX market and stock exchange, vowing more actions if needed to “maintain sound functioning of financial markets.”
The Turkish Lira weakened to a record low against the U.S. dollar and euro, while the benchmark BIST 100 index declined sharply on March 19, triggered by political developments.
In the wake of the market fluctuation, the bank first decided to start conducting lira-settled foreign exchange forward selling transactions.
The bank said it was commencing the FX transactions “in order to ensure the sound functioning of the foreign exchange market, prevent possible volatilities in exchange rates and stabilize foreign exchange liquidity.”
In its next move, in an unscheduled Monetary Policy Committee meeting on March 20, the bank raised its overnight lending rate to 46 percent from 44 percent.
The decision reflected the bank's assessment of risks posed by current market conditions to the inflation outlook, underscoring its commitment to supporting a tight monetary policy to combat inflationary pressures.
The policy rate, the one-week repo auction rate, and the bank’s overnight borrowing rate were kept at 42.5 percent and 41 percent, respectively.
“Furthermore, lira and FX liquidity measures have been introduced to limit market volatility,” the bank said in a statement.
“In order to maintain the sound functioning of financial markets, additional actions will be taken if deemed necessary,” it added.
The bank reiterated that the monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen.
On the same day, the bank announced that “considering the developments in financial markets, it has been decided to suspend the one-week repo auctions for a period of time.”
Finance Minister Mehmet Şimşek assured investors that the government is not changing course on economic policies.
“Everything necessary is being done for the healthy functioning of markets. The economic program we are implementing continues with determination,” Şimşek said on X on March 19.
Analysts argue that Türkiye has scope to weather the volatility, noting enough reserves in the bank’s coffers.
Investment banks Goldman Sachs and JP Morgan said the bank can mitigate the risks of dollarization, noting that the Central Bank’s gross reserves are at $170 billion.
Current FX reserve buffers are sufficient for the Central Bank to act with resolve, said JP Morgan analysts.
“We believe the Central Bank will provide sufficient supports for market functioning and liquidity in coming days,” they said.
Similarly, analysts at HSBC noted that gross FX reserves stand at $98 billion and the Central Bank is well-placed to meet any FX demand that might arise from onshore or offshore.
