Turkey has announced the return of a controversial policy of intervening in foreign exchange markets in an attempt to stabilize the fall of the pound, despite a previous pledge not to do so and limited foreign exchange reserves.
The country’s central bank said on Wednesday that “unhealthy price formations” prompted the decision to sell hard currencies such as the US dollar in a bid to support the lira.
President Recep Tayyip Erdogan backed the move, telling reporters that the central bank’s statute contained a provision allowing for currency intervention. “If they have to intervene in this way, they do it,” he said.
The move comes after the pound fell to a record low of 13.87 TL against the US dollar earlier on Wednesday, a 46% drop from its starting point in 2021. The announcement sparked a strong rally with the currency strengthening to around 12 TL. 0.5 in trades in London – later reducing some of his gains to 13.2 TL to the dollar.
Turkey has not announced any direct foreign exchange intervention since it sold $ 3.2 billion in early 2014. However, the country burned tens of billions of dollars from its foreign exchange reserves in 2019. and 2020 in an unofficial intervention that attempted to bolster the lire through a complex arrangement with state banks.
This policy, carried out by Erdogan’s son-in-law Berat Albayrak while he was finance minister, was very controversial. Opposition parties popularized the slogan: “Where is the $ 128 billion?” – a reference to an estimate of the amount of money spent on the ultimately futile intervention.
The scheme was halted in November 2020 when Erdogan brought in Naci Agbal, a respected former bureaucrat, as head of the central bank and Albayrak resigned. Agbal was fired less than four months after his appointment.
Wednesday’s intervention was limited in size to between $ 300 million and $ 500 million, according to two financial industry sources.
“The intervention volume does not appear to be very large, which makes sense given that their net reserve position is between very bad and negative by the exact definition,” said Paul McNamara, of GAM asset manager.
“This intervention alone will not work,” he added. “The market will continue to pull back until they see [the central bank] intervenes again. If they make it clear that they are ready to step in repeatedly and deplete their reserves, it may work for a while. But this is not a sustainable position.
The country’s international reserves fell to their lowest level in 20 years last year as the multibillion-dollar currency intervention took its toll.
The central bank’s currency war chest had recovered significantly this year, with gross reserves in particular showing improvement thanks in part to swap agreements with other central banks and a one-time allocation from the IMF.
But net reserves – which offer an indication of the bank’s firepower to defend the currency – remain deeply negative once the borrowed money is withdrawn. The country’s net reserves, excluding funds traded through swaps with Turkish commercial banks and other central banks, are estimated at minus $ 46.8 billion, according to Goldman Sachs. Gross reserves stood at $ 128.4 billion in the week to Nov. 19, the Wall Street bank said.
Central bank governor Sahap Kavcioglu said in October that the bank did not plan to revert to currency interventions, which had drawn strong criticism from international investors.
But the lira plunged into a succession of record lows as the bank repeatedly cut interest rates despite inflation of nearly 20%. President Erdogan signaled that more rate cuts would follow.