No Central Bank intervention in FX market, says Erkan

ANKARA

The Central Bank is not intervening in the foreign exchange market, Governor Hafize Gaye Erkan has said, pointing out that the increase in reserves is an indication of this.

“If there had been interventions in the U.S. dollar [in the FX market], reserves would have not increased that much,” Erkan said in an interview with daily Hürriyet.

The Central Bank’s gross reserves climbed to an all-time high of $141.4 billion as of Dec. 8, with foreign currency reserves hitting $94.5 billion.

The Central Bank is operating in the FX market due to its obligations stemming from regulations, she added.

The renewal rate of FX-protected deposit accounts (KKM) is between 75 to 80, while around 15 percent of KKM deposit holders switch to lira deposits, Erkan explained.

“For reasons I don’t really understand, 5 percent of those KKM holders turn to foreign currencies. It doesn’t make sense to switch to foreign currencies at the current level of interest rates.”

The Central Bank needs to provide the market with FX to meet the demand coming from this 5 percent, she furthered. “We directly sell FX to banks for this, but the amount of FX sales is very small.”

She also said that more and more deposit holders are switching to lira deposit accounts, noting that lira deposits have risen by 1.5 trillion liras since the start of September, while the KKM deposits have fallen by 650 billion liras.

“FX deposits are down by $4 billion. This is a huge success.”

[HH] Fighting inflation

The steps taken within the monetary policy have had the biggest impact on the prices of certain goods, such as cars, white goods and furniture, but the policies’ impact on prices is expected to become more widespread starting from the first quarter of 2024, Erkan said.

The pace of growth in rents is also slowing, though there is more time to reach a point where the increase in rents falls behind the headline inflation, Erkan said.

“All this shows that the monetary policy works,” she said, reiterating that inflation will decline to single digits in 2026.

When asked about foreign investors, Erkan said that as the Central Bank simplifies macroprudential policies, the yield curve has moved to where it is supposed to be.

Foreign funds have been buying government bonds, according to Erkan. “There has been strong and ever-increasing interest, especially from the U.S. [investors], in the Treasury’s bond auctions over the past four weeks.”