Turkey’s Central Bank kicks off monetary tightening, dollar down from all-time high

ISTANBUL - Reuters

'A strong additional monetary-tightening program will be kicked off as of today,' Başçı said in a written statement in the morning. DHA Photo

The Turkish central bank auctioned a record $2.25 billion in foreign exchange yesterday right after it announced that it will embark on a monetary tightening program for an uncertain period in order to shore up the lira after it hit a record low value against the dollar.

“A strong extra monetary tightening will start as of today,” the bank’s head Erdem Başçı said in a written statement released on July 8.

“It’s essential that the extra monetary tightening is strong, effective and temporary,” he said.
The lira touched a new all-time low of 1.9740 against the U.S. currency after dropping slightly after benk’s tightening announcement it rebounded to 1.9480 by 1151 GMT after the bank held seven forex-selling auctions.

The auctions, which totalled as the highest amount the bank has ever sold via forex auctions in a day, sent 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 defence on fears currency weakness will lead to a wholesale exodus of foreign capital from domestic capital markets.

“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 Şengül Dağdeviren, 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.”

The Central Bank has been holding forex auctions since June 11 to support the weakening lira.

Not currency, loan growth targeted: Başçı

“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.”

At a meeting with economists yesterday, Başçı gave the message that its additional tightening steps were aimed more at limiting loan growth than supporting the lira, bankers at the meeting said.

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, they 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. 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.