Turkish Central Bank Expected to take Measures Against Depreciation of Turkish Lira

The Monetary Policy of Turkey’s Central Bank meets extraordinarily today to officialy discuss ‘public debt in certain European countries and the global growth outlook.’ Last time the committee had an unscheduledmeeting was followed by a rise in key interest rate in a bid to save Turkish Lira’s value

Some economists expect the Turkish Central Bank to take measures against the depreciation of the Turkish Lira. The US dollar was trading above 1.7 liras as of Wednesday.Turkey’s Central Bank was preparing to intervene in the currency market on Thursday, following a fresh move by Switzerland, amid concerns that a new phase of currency wars may be starting as debt-hit Europe’s common money continues to lose value.

The Turkish Lira is imitating the euro’s downward trend as the value of the currency started going down following a Central Bank decision last week to stop daily foreign exchange purchases.

The Turkish Central Bank’s Monetary Policy Committee will have an unscheduled interim meeting on Thursday to discuss the growing concerns on “public debt in certain European countries and the global growth outlook,” according to a statement on Wednesday.
The meeting will take place from 10 a.m. to noon local time, with an announcement of the outcome to follow, the bank’s website said.
The meeting comes as concerns over European sovereign debt and U.S. public finances coincide with worries over Turkey’s gaping current account deficit. The U.S. dollar was trading above 1.70 liras on Wednesday, as foreign investors dumped Turkish assets.

The Swiss National Bank, or SNB, meanwhile, announced a shock cut in interest rates and threatened more action to cap a soaring Swiss franc, but was seen fighting a losing battle as investors seek respite from debt crises elsewhere, Reuters reported Wednesday.

The SNB said Wednesday it would cut its target rate to “as close to zero as possible” from an already rock-bottom 0.25 percent, and said it would significantly increase the supply of francs in the money market over the next few days.

The Swiss authority said it would not tolerate the effective tightening of monetary conditions imposed by what it called a “massively overvalued” franc, which was threatening economic growth and increasing downside risks to price stability.

Central Bank could hike overnight inter-bank lending rate

In order to prevent the Turkish Lira from sliding further, several experts are voicing their opinion of what type of precautionary measures Turkey’s Central Bank may choose to execute.

Özgür Altuğ, chief economist at BGC Partners, wrote in a short note to investors that the Bank could switch to a different monetary policy scenario and introduce a series of measures.

The Central Bank might, among others, decide on a hike in its overnight borrowing rate, which was reduced sharply from above 6 percent to 1.5 percent in the fourth quarter of 2010, in order to attract short-term foreign capital inflows to limit the depreciation of the lira, Altuğ said. Other measures could be a cut in foreign exchange required reserve ratio to support the foreign exchange liquidity of the system and banks’ lending capacity and the introduction of daily foreign exchange selling auctions, he added.

However, Timothy Ash of the Royal Bank of Scotland disagreed in a note. “We don’t expect further changes in required reserve ratios – albeit in recent weeks the Central Bank cut foreign exchange required reserve ratios to help prop up the lira amid selling pressure as markets focus on Turkey’s wide current account deficit,” he said.

“Although we attach a much lower probability, we think that a Turkish Lira required reserve ratio cut might be on the agenda as well,” Altuğ said in his note.

On further speculation, tomorrow’s meeting could announce a narrowing of the so-called ‘interest rate corridor’ – the gap between the rate that banks lend to and borrow from the CBRT overnight, Neil Shearing of the London-based Capital Economics said in a Capital Economics analysis on Wednesday.

“Either way, it remains to be seen how effective any such measures will be in stemming the lira’s fall,” Shearing said.

Turkey’s Central Bank had its last unscheduled meeting in June 2006, focusing on more or less the same agenda: to discuss developments in the global economy. The bank’s monetary policy board met on Sunday, June 20, just five days before its scheduled meeting, when it decided on a sharp increase in the interest rate to prevent depreciation in lira.

August 3, 2011
SOURCE: TURKISH DAILY NEWS