Turkey’s central bank aiming orthodoxy

In its minutes on the latest MPC meeting, Turkey’s central bank said it would maintain its tight monetary policy after increasing interest rates to 15% from 10.25% on November 19.

The bank underlined that the monetary policy stance is needed to tackle inflation, outlining its reasoning for the decision to hike rates and simplify the funding scheme last week.

“Tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved,” the central bank said.

The central bank said that it expected inflation to accelerate in November, but it added that monetary policy steps would help in keeping the expected temporary.

The central bank’s Monetary Policy Committee is due to meet on interest rates again on Dec. 24. In the November minutes, the Board had also discussed the need to make changes to the reserve requirement system.  Hence, the move is now expected on December 24.

Swap transaction limits raised

The central bank raised limits for fx-lira swap market transactions in auctions to 60% of bank’s foreign exchange market transactions from a previous 50%.  The same limit was 20% back in April and the bank had raised the limit as it sought to raise more foreign currency via swap arrangements with local banks to bolster its reserves.

Earlier this month, Turkey also eased swap limits for banks trading with foreign financial institutions, in a move welcomed by foreign investors.

Banks may now sell liras worth up to 5% of their equity to foreign entities for transactions that mature in seven days, 10% for transactions maturing in a month and 30% for those maturing in a year. That step was welcomed as a sign of the central bank’s renewed adherence to free market principles, although investors said it may pressure the central bank’s foreign currency reserve levels in the short term.

No fx buying- better not be at this stage

Despite the ongoing speculations, the central bank is not using recent strength in the lira as an opportunity to buy foreign currency, Reuters reported. Such fx buying would have added to the TL weakness amidst the lack of foreign flows to the Turkish markets.

Some traders said the lira’s rally against the dollar following a rate hike had opened a window for the central bank to rebuild its depleted foreign currency reserves. Sources from within the bank requesting anonymity said the central bank was not buying foreign currency.

Central bank data showed its net foreign exchange reserves, excluding swaps, fell to USD16 bn in mid-November, Reuters said. Ratings agency Fitch said last week that the reserves, including liabilities such as swaps, stood at a negative USD46.5 billion.

From an al time low of 8.58 per dollar on Nov. 6, the President sacking the central bank governor and the Treasury and Finance Minister Albayrak’s resignation had rallied the TL as high as 7.5 per dollar.  Since the rate hike it has been mostly volatile, trading at 7.88 per dollar on Thursday.