Monday, May 27, 2019

Turkey raises FX reserve requirements another 200 bps

    Turkey's central bank raised its reserve requirement for banks' foreign currency deposits by a further 200 basis points, "to support financial stability," withdrawing another US$4.2 billion of liquidity from the market.
    Today's move follows the Central Bank of the Republic of Turkey's (CBRT) 100-basis-point increase in the FX reserve requirement earlier this month in a move that also included a lowering of the upper limit of foreign exchange banks could use as part of their reserves at the central bank.
    As a result of the May 9 increase in FX requirements, US$3 billion of FX liquidity was withdrawn from the market.
     On May 9 CBRT also suspended its one-week repo auctions "for a period of time," effectively raising its lending rates by 150 basis points as banks would have to obtain funds via overnight rates that are above the benchmark repo rate at 24.0 percent.
     On May 21 press reports said the central bank had started to offer funds at 24.0 percent through repo actions.
     After plunging in August last year and then rebounding from September through January this year, Turkey's lira has faced fresh pressure since February from a combination of the threat of U.S. sanctions, uncertainty over local elections, and continued questions over the central bank's independence and commitment to fighting inflation.
     Today the lira was trading at 6.05 to the U.S. dollar, down 12.7 percent this year following last year's 28 percent drop.
    On April 25, when CBRT left its repo rate steady, unchanged since September 2018, it puzzled analysts by dropping a reference to tightening its monetary policy if needed despite the inflationary pressures from a declining lira.
     Turkey's inflation rate has only inched down to 19.5 percent in April form 20.35 percent in January while it's economy fell into recession in the last two quarters of 2018 as gross domestic product dropped 1.6 percent quarter-on-quarter in the third quarter and then 2.4 percent in the fourth quarter for an annual decline of 3.0 percent.
     Following the change to its guidance in April, CBRT Governor Murat Cetinkaya held a briefing in connection with the latest inflation report where he sought to ease concerns the central bank was giving in to political pressure to lower interest rates and boost the economy.
     According to press reports, Cetinkaya said additional tightening would still be delivered if upside risks to inflation materialize but he failed to answer why the policy statement had dropped its reference to further tightening if needed.
     In its inflation report, CBRT maintained its forecast for inflation to fluctuate between 12.1 percent and 17.1 percent this year, ending the year at 14.6 percent.
     In 2020 inflation is seen fluctuating between 5.1 percent and 11.3 percent, ending the year at 8.2 percent before gradually stabilizing around CBRT's 5.0 percent target.


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