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Turkey’s central bank is defending the lira and intervening in the market for the first time in seven years


The Turkish lira has fallen again close to a record low today. Behind its decline is President Recep Tayyip Erdogan, who continues to promise low interest rates despite high inflation in the country. The central bank intervened in the foreign exchange market to save the lira, which it did for the first time in seven years.

The US dollar strengthened against the lira today to just under 14 lira, while the euro climbed to almost 16 lira. For comparison, at the beginning of the week, 14 lire had to be paid temporarily for one euro, in mid-November it was only 12 lire. The Turkish currency has lost 47 percent since the beginning of the year, writing off 30 percent in November alone. The fall of the lira ignited a demonstration in Erdogan’s resignation.

Historical development of the dollar-to-lira exchange rate:

Turkey’s central bank, whose leadership has been changed several times by the president, therefore sold foreign exchange today for the first time in seven years to ease the fall of the lira. She justified the move with “unhealthy pricing” in the market. After her intervention, the Turkish currency strengthened slightly.

The resentment of investors and another sale of the lira was triggered again by President Erdogan. In an evening interview with the TRT television station, he promised the Turks low interest rates until the elections scheduled for 2023 – despite the fact that, according to current economic theory, low rates continue to drive high inflation in Turkey, which is around 20 percent. Erdogan repeated that he insisted on lower interest rates for the sixth time in 14 days.

Two weeks ago, the Turkish central bank cut its key interest rate by one percentage point to 15 percent. The interest rate cut began in September, when the base rate was 19 percent. It has responded to pressure from the Turkish president, who hopes that lower borrowing costs will support the Turkish economy.

Today’s intervention by the Turkish central bank shows that central bankers are determined to show how weak the lira they are willing to tolerate. How long they will be able to buy Turkish currency time to rest is necessarily limited by the resources at their disposal and the extent to which they intend to draw from them.

According to the latest data from November 19, the central bank had $ 128.5 billion in gross reserves. But when we take down swaps and other liabilities, such as reserve requirements, the bank’s net reserves are $ 35 billion negative. The bank has made it known several times that gross reserves are more important to it than net reserves, so the significance of today’s intervention can be mainly symbolic. In 2018, when the lira was under similar pressure, no intervention was announced. Central bankers can now tell the markets that in their efforts to prevent speculation on the domestic currency, they may act differently this time, Bloomberg wrote in his live blog.

Sources: Bloomberg, ČTK

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