Turkey’s central bank prepares for potential Fed rate hike

Central bank of Turkey takes measures to stabilise Turkish lira, implements policy shifts prior to US Federal Reserve’s expected interest rate hike

Photo by: Reuters
Photo by: Reuters

A money changer counts US dollar bills, with Turkish lira banknotes in the background, at a currency exchange office in central Istanbul, Turkey, August 21, 2015

Turkey’s central bank announced a series of measures on Saturday, aiming to protect the Turkish economy from the negative impacts of volatility in the global markets. The central bank’s policy shift is expected to stabilise the Turkish lira, as well as providing support for the country’s commercial lenders.

In order to encourage the banks to borrow longer term, the central bank raised the reserve ratio on lenders' short-term hard currency borrowings.

Also, in an effort to support the foreign exchange liquidity, the bank increased the limits on foreign exchange transactions that banks can do with the central bank. This will be approximately by 130 percent to $50 billion, starting from Sept. 1, 2015.

Additionally, aiming to reduce intermediation costs of the banking sector and support core liabilities, the central bank said the interest rate paid on lira-denominated reserves that lenders hold with the Central Bank of Turkey will rise by 150 basis points by Dec. 1.

Central bank Governor Erdem Basci said last month that the bank will simplify its complex monetary policies, such as narrowing interest rate corridor system, which is the gap between the bank’s overnight lending and borrowing rates.

In line with other emerging market currencies, the lira has weakened to record lows against the dollar in the past two weeks. The fears over slowdown in the Chinese economy and the prospective interest rate hike in the US triggered huge selloffs in emerging markets’ currencies and stock markets.

The lira was quoted at 2.9235 per dollar on Friday evening, weakening from 2.9070 on Thursday evening.

TRTWorld and agencies