Turkey’s national currency, the lira, has experienced another setback, hitting a fresh record low against the U.S. dollar. This decline came about after the country’s central bank implemented measures to simplify regulations surrounding the holdings and foreign deposits of lenders. These actions were taken following a significant interest rate hike just last week.
The lira depreciated to 25.76 against the dollar, surpassing the previous all-time low of 25.74 witnessed just a week ago. Year-to-date, the currency has experienced a staggering 27% decline, largely attributed to President Tayyip Erdogan’s re-election in late May. Since then, Erdogan has taken steps to backtrack on his unorthodox economic policies, which included slashing interest rates despite rising inflation.
In recent days, two major measures were implemented. First, the central bank, under the guidance of Governor Hafize Gaye Erkan, raised interest rates by 650 basis points to 15% on Thursday. While this move fell short of market expectations, it still represented a significant tightening of monetary policy.
Next, on Sunday, the central bank initiated a rollback of numerous rules and regulations that had been established since 2021. These regulations heavily influenced debt, credit, and forex markets, as they aimed to promote the holding of lira. The objective of these recent actions is to create a more liberalized and stable market environment, as stated by the bank over the weekend.
One notable change can be seen in the reduction of the securities maintenance ratio for banks’ foreign currency deposits. Previously set at 10%, it has now been lowered to 5%. Additionally, the new regulations specify that banks must maintain securities ranging from 3% to 12% of their lira deposits, compared to the previous range of 3% to 17%.
Furthermore, banks with lira deposits constituting less than 57% of their total deposits will be required to hold an additional seven percentage points of securities, instead of the previous requirement of seven additional points for banks with less than 60% lira deposits.
By gradually reducing these ratios, banks have the opportunity to adjust their positions without triggering a sudden increase in interest rates. This slight relaxation of the rules provides banks with the necessary flexibility and time to manage their bond portfolios more effectively, according to Enver Erkan, Chief Economist at Dinamik Yatirim.
Overall, these developments offer a sense of reassurance and present a positive outlook for the banking sector.
