Turkey’s Central Bank to Support Embattled Lira

Gladys Abbott
August 13, 2018

After several hours of volatile trading, the Turkish lira has settled around 6.87 lira to the USA dollar.

The details would be unveiled shortly, the country's finance minister told Turkish newspaper Hurriyet.

"As of Monday morning, our institutions will take the necessary actions and will share the necessary announcements with markets", Albayrak was quoted as saying while adding that the plan would centre on "the state of our banks and the small and medium size enterprises" most affected by the lira's plunge.

The lira has been hammered this year, having started January at around 3.70 to the dollar according to Bloomberg data, while it is also sharply down against the euro.

Another factor to bear in mind, though, is that - as with the pound - some of these currency falls may appear more intense because of the U.S. dollar's current strength.

The lira crisis therefore - at the very least - reflects the political and economic turmoil taking place in Turkey.

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"Turkey does not trigger such a devastating series of crises in other emerging markets that the combined impact could dent growth in the developed world in a meaningful way", said Holger Schmieding, an economist with Berenberg Bank.

"I am specifically addressing our manufacturers: Do not rush to the banks to buy dollars", he said.

Businesses should "know that keeping this nation alive and standing isn't just our job, but also the job of industrialists, of merchants".

Why is the lira falling?

But, "we do not see Turkish developments as a repeat of "Greece" for European banks, EUR/USD and global financial markets".

Oil prices edged higher with Brent up 5 cents at $72.86 a barrel, while USA crude added 15 cents to $67.78.

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Turkish lira to the USA dollar.

"Politicians who act in good faith and advocate diplomacy will strengthen the Turkish people's confidence in our relations with Germany and the European Union", he added. President Donald Trump tweeted Friday.

The detention of an American pastor in Turkey has cast doubts over the future of partnership with Washington.

In a statement the White House clarified that Trump had authorized the preparation of documents to raise steel and aluminium tariffs.

What are officials doing about it?

Turkey has drafted an economic action plan and has started implementing it "as of tonight" to ease investor concerns, Treasury and Finance Minister Berat Albayrak tweeted Sunday night.

"Nobody. has an interest in the economic destabilisation of Turkey but of course everything must be done so that, for example, an independent central bank can operate", she said in Berlin.

Isik said the lira's current levels would add between 4 and 5 percentage points to headline inflation in coming months, pushing it up to around 21 percent in September from almost 16 percent last month.

But there are fears that Mr Erdogan, who is famously averse to interest rate rises, may be pressuring the central bank not to act.

They said the bank's decision could be the first step towards tightening policy through the use of an interest rate corridor, an instrument used in previous years, rather than an increase in the benchmark rate. So, when the lira falls, the debt becomes more expensive. Earlier, the central bank pledged to provide liquidity and cut lira and foreign currency reserve requirements for Turkish banks.

Eight years ago, concerns about contagion during the eurozone debt crisis saw investors push up the borrowing costs of highly indebted eurozone countries, exacerbating their debt problems.

The cycle is, in the jargon, "late stage" and so any sign of danger will be an excuse to sell assets that appear at all risky.

The rout in the lira "may fuel volatility in emerging-market assets and dampen investor sentiment in the near term, as markets are already skittish", said Kerry Craig, global market strategist at JPMorgan Asset Management.

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