Turkey Monetary Policy


Turkey: Lira appreciates as Central Bank reveals action plan

November 1, 2011

On 31 October, the Turkish lira (TRY) traded at 1.76 per USD, which represented a 5.4% appreciation over the 1.85 TRY per USD tallied on the last day of September. However, on a year-on-year basis, the lira depreciated 18.4% against the U.S. dollar, which in part is a reflection of the widening current account deficit. The TRY, which had continued to depreciate throughout the whole month, rose following the Central Bank of Turkey's (CBRT) 26 October announcement of a comprehensive plan to curb the lira's excessive depreciation and to strengthen the currency. According to the plan, the Central Bank will maintain the tightening bias in its monetary policy stance to ensure price stability. In addition, the CBRT will control the provision of liquidity to the banking system via an appropriate management of the overnight lending facility and of the weekly repo auctions. The CBT will decide whether or not to operate weekly repo auctions, in which case commercial banks may borrow at the 5.75% 1-week repo rate. Alternatively, banks will be forced to tap resources from the overnight facility at the current 12.5% overnight lending rate. According to analysts, this setting will add uncertainty to the commercial banks' borrowing policy, and they will be obliged to take a more conservative approach to balance sheet management. Moreover, the CBRT will introduce changes to the required reserve policy, including letting banks use gold, and a larger amount of foreign exchange to comply with the reserve requirements. The aim of the measure is to increase the Central Bank's gold and international reserves, and thereby provide monetary authorities with room to maneuver whenever currency intervention is called for.


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