Turkey has announced a return to a contentious policy of intervening in the currency markets in an attempt to steady the tumbling lira, despite a previous commitment not to do so and limited foreign exchange reserves.
The country’s central bank said in a press release that “unhealthy price developments” had prompted the decision to sell hard currency such as US dollars in an effort to support the lira.
Its move comes after the lira tumbled to a record low of TL13.87 against the US dollar earlier on Wednesday, a decline of 46 per cent compared with where it started 2021. The announcement sparked a strong rally, with the currency strengthening to around TL12.5 in London dealings — later trimming some of its gains to sit at TL13.2 to the dollar.
Turkey’s intervention marks the resumption of a highly controversial policy that saw the country burn through tens of billions of dollars of its foreign currency reserves in 2019 and 2020 in an ill-fated attempt to prevent the lira from losing value as the central bank slashed interest rates.
The country’s net reserves excluding funds borrowed through so-called swap arrangements with local banks and other central banks are estimated at minus $46.8bn, according to Goldman Sachs. Gross reserves were $128.4bn in the week to November 19, the Wall Street bank said.
Central bank governor Sahap Kavcioglu said in October that the bank did not plan to return to currency interventions, which had drawn strident criticism from Turkish opposition parties as well as international investors.
But the lira has plunged through a succession of record lows as the bank has repeatedly cut interest rates despite inflation of almost 20 per cent. President Recep Tayyip Erdogan has signalled that more rate cuts will follow.