Turkey’s central bank started to buy more liras than it sells to the banking system after the nation’s flagship lira savings tool and efforts to replenish reserves released hundreds of billions of liras into the economy, undermining monetary-policy tightening.
(Bloomberg) — Turkey’s central bank started to buy more liras than it sells to the banking system after the nation’s flagship lira savings tool and efforts to replenish reserves released hundreds of billions of liras into the economy, undermining monetary-policy tightening.
The monetary authority in Ankara became a net borrower of liras via open-market operations for the first time in three years, a sign of abundant lira liquidity in the financial system. Meanwhile, the central bank’s accumulation of foreign-currency reserves is also resulting in more liras being pumped into the economy.
As a result, interest rates on lira-denominated assets are dropping, trimming the currency’s appeal as a savings vehicle at a time when the lira is already one of the world’s worst performers. The average rate on lira deposits of up to three months fell for a second week to 37.8% from 42%. The lira overnight reference interest rate, or TLREF, slid to 13.5% from above 16%, well below the central bank’s benchmark rate of 15%.
The Turkish currency has lost more than 30% of its value against the dollar this year, the biggest drop in major emerging markets after Argentina’s peso.
While policymakers delivered Turkey’s first rate hike in more than two years last month, the 650 basis-point increase underwhelmed market participants, who were predicting more. Economists now expect the central bank to deliver another small hike at Thursday’s policy meeting, lifting it by 350 basis points to 18%, according to the median estimate in a Bloomberg survey.
“We think the central bank’s gradual approach to monetary tightening will see the policymakers deliver a hike of 300 basis points to the key rate on Thursday,” said Selva Bahar Baziki, Turkey economist at Bloomberg Economics. “The liquidity in the currency could make a tightening move in the CBRT’s alternative tools likely as well.”
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