Turkish State Banks Hold off Lira Defense in Policy Shift Signal

2023-06-22 23:30

Turkey’s state-run banks didn’t intervene to prop up the lira on Thursday, even after a central bank interest-rate

Turkey’s state-run banks didn’t intervene to prop up the lira on Thursday, even after a central bank interest-rate decision sent the currency to a record low, signaling what could be a decisive shift in policy.

The banks held off selling dollars in the market as the currency fell 4.4% to 24.62 per dollar, according to traders who asked not to be identified, because they weren’t authorized to speak publicly on the matter.

The banks had earlier even bought greenbacks before the rate decision, when the lira firmed to 23.55 per dollar, they added.

The state banks don’t comment on their interventions in the foreign-exchange market.

Thursday’s shift indicates that Turkey’s new economic team is serious about curbing currency market interventions. For years, state lenders regularly stepped in to defend the currency on behalf of the central bank. They suspended interventions after the end-May election, but resumed on June 8 to staunch a 7% lira plunge.

The latest lira fall reflects disappointment that Turkey’s central bank raised its benchmark one-week repo rate only to 15%, from 8.5%, well below what had been anticipated. Policymakers said they were embarking on a gradual transition from an era of ultra cheap money.

Mehmet Simsek, the former investment banker who returned as Turkey’s economic czar this month, emphasized in a Twitter post on Thursday that he favors a free-floating foreign exchange regime.

“Policy framework based on the principles of market economy, free foreign exchange regime and open economy will ensure significant capital inflow to Turkey,” Simsek wrote.

Meantime, investment banks revived their bearish lira calls.

Citi strategists suggesting selling the currency, seeing potential for further central bank action, including partial removal of lira bank deposit mechanisms, which could fuel greater demand for the dollar.

Bank of America Corp. noted that while the central bank had made no specific mention of the exchange rate, they expect it “will be relaxed over time and the CBT will allow the currency to float free.”