The Turkish lira remained at a record low against the US dollar on Tuesday, as the country’s central bank halted the sale of its foreign exchange reserves to support the domestic currency. The lira is currently trading above 26 against the US dollar, marking a 28% decline for the year so far.
This decline can be attributed to the recent decision by Turkey’s central bank to ease regulatory requirements in the banking industry, which aimed to support the national currency. Last week, the regulator raised interest rates by 650 basis points to 15% in an effort to stabilize the currency. However, it also chose not to inject more foreign exchange reserves to maintain the exchange rate. According to Bloomberg, Turkey has already spent approximately $200 billion in the past 18 months to support the lira, depleting its reserves as interest rates remained artificially low.
The central bank’s net international reserves dropped to a 21-year low of $2.33 billion in the week ending May 12 as demand for foreign exchange surged in anticipation of elections.
In response to the situation, the central bank stated over the weekend that its latest measures were aimed at freeing up markets and ensuring stability. A senior official also confirmed that the bank had adjusted its foreign exchange policy. The official stated, “The central bank is not intervening in any way on the exchange rate level by selling foreign currency after its interest rate decision last week. The numbers are determined entirely by the free market. Hence, there is no use of foreign exchange reserves, and a period of increasing reserves has started.”
These recent developments indicate that the Turkish government is adopting a more hands-off approach to managing the exchange rate, allowing market forces to determine its value. By halting the sale of forex reserves, the central bank is signaling a shift towards a more market-oriented policy. This move is in line with President Recep Tayyip Erdogan’s call for more “rational” economic policies to address the country’s struggling economy.
The Turkish lira’s continued depreciation against the US dollar raises concerns about inflation, as imported goods become more expensive. It also poses challenges for Turkey’s external debt, which is denominated in foreign currencies. The weakening currency increases the burden of debt servicing, making it more difficult for the government and businesses to repay their foreign obligations.
In conclusion, Turkey’s central bank’s decision to stop selling forex reserves to maintain the exchange rate of the lira is leading to its continued depreciation against the US dollar. While this may result in greater market volatility, it also indicates a shift towards a more market-oriented policy. The Turkish government is now focusing on adopting “rational” economic policies to address the challenges facing the country’s struggling economy. However, the depreciation of the lira raises concerns about inflation and the burden of external debt.
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