Turkish lira pulls back from record low after central bank frees up liquidity

ISTANBUL - 13 August 2018: Turkey’s lira pulled back from an overnight record low of 7.24 to the dollar on Monday after the central bank pledged to provide liquidity and cut lira and foreign currency reserve requirements for Turkish banks.

The announcement came after Finance Minister Berat Albayrak said authorities would start implementing an economic action plan on Monday morning, following Friday’s lira crash, which has spread to global markets.

The central bank said it cut the lira’s reserve requirement ratio, a cash buffer held by banks, by 250 basis points for all maturity brackets and lowered reserve requirement ratios for non-core FX liabilities by 400 basis points for maturities up to three years.

These moves will free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system, the bank said. It also pledged to provide “all the liquidity banks need”.

The lira TRYTOM=D3 hit a record low of 7.24 against the dollar during in Asia Pacific trade. It pared losses after Albayrak's comments and the central bank announcement, strengthening to 6.4, before weakening again to 6.92 to the dollar at 0543 GMT.

The currency has lost more than 40 percent against the dollar this year, largely over worries about President Tayyip Erdogan’s influence over the economy, his repeated calls for lower interest rates, and worsening ties with the United States.

The lira’s relentless fall turned to meltdown on Friday. It dropped as much as 18 percent at one stage, rattling U.S. and European stocks as investors took fright over banks’ exposure to Turkey.

The renewed lira collapse on Sunday night hit Asian shares, weakened the South African rand and drove demand in global markets for safe currencies including the U.S. dollar, Swiss franc and yen.

Finance Minister Albayrak said in an interview published late on Sunday that Turkey has drafted a economic action plan and will start implementing it to ease investor concerns.

“From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” he said, without giving details.

BlueBay Asset Management strategist Timothy Ash said the plan should have been ready before Asian markets opened.

“They are just always behind the curve, always catching up, always too late, and then the damage is done. Text book stuff of how not to manage a crisis,” he wrote on Twitter.

Albayrak said budget discipline would be the most important foundation of Turkey’s new economic approach and fiscal rules would be implemented for targeted indicators if necessary.

The minister also said a plan has been prepared for banks and the “real” economy, including small to mid-sized businesses which are most affected by the foreign exchange fluctuations.”We will be taking the necessary steps with our banks and banking watchdog in a speedy manner,” he said.

Albayrak dismissed any suggestion that Turkey might intervene in dollar-denominated bank accounts, saying any seizure or conversion of those deposits into lira was out of the question.

In the interview with Hurriyet newspaper, Albayrak described the lira’s weakness as “an attack,” echoing Erdogan - who is his father-in-law.

Erdogan, who has called himself an “enemy of interest rates,” wants cheap credit from banks to fuel growth, but investors fear the economy is overheating and could be set for a hard landing.

On Sunday, speaking to supporters in Trabzon on the Black Sea coast, Erdogan dismissed suggestions that Turkey was in a financial crisis like those seen in Asia two decades ago.

The lira’s free-fall was the result of a plot and did not reflect economic fundamentals, he said. “What is the reason for all this storm in a tea cup? There is no economic reason... This is called carrying out an operation against Turkey,” he said.

The central bank raised interest rates to support the lira in an emergency move in May, and again the following month. But it did not tighten monetary policy at its last meeting three weeks ago.

Turkey’s banking watchdog BBDK in a statement said it was limiting banks’ foreign exchange swap transactions.