Turkish lira flat after touching record low

Turkey’s lira was mostly flat on Tuesday, after touching a new record low overnight, while bankers said the central bank’s net reserves had marked their largest rise on record last week as it stopped using the reserves to support the lira.

The lira touched a record low of 26.10 against the dollar early on Tuesday during low liquidity hours and later firmed to as much as 25.55. But it later gave up those gains to stand at 26.03 at 0857 GMT, compared with a close of 26.05 on Monday.

The currency has weakened some 28% this year, largely after the re-election in late May of President Tayyip Erdogan, who has since moved to backtrack on his years of unorthodox economic policy.

As part of the policy pivot, the central bank stopped using its reserves to counter forex demand and support the lira. Its net reserves had touched an all-time low of negative $5.70 billion last month after a years-long decline.

Four bankers calculated that the central bank’s net forex reserves had risen by about $8.5 billion last week to around $9 billion, which would mark the largest weekly rise on record.

The largest weekly rise in net international reserves was in February 2002 with $8.2 billion.

The bank’s total reserves were also expected to have risen by about $4.5 billion to stand at about $107.5 billion as of June 23.

Reuters Graphics
The central bank raised its policy rate by 650 basis points last week, in the strongest signal of a return to orthodoxy, after years of loose policy despite soaring inflation under Erdogan.

The increase was lower than expected, leading some analysts to suspect that new Central Bank Governor Hafize Gaye Erkan, a former Wall Street banker, may have limited room to manoeuvre under Erdogan.

The bank also rolled back some macroprudential measures it has implemented in recent years as part of its “liraisation” targets.

Inflation surged after a late-2021 currency crisis that was sparked by rate cuts that Erdogan had called for, based on his view that interest rates cause inflation. Annual inflation touched a 24-year peak of 85.51% in October before easing.

Monthly inflation was seen at 4.84% in June, even as the annual reading was expected to decline slightly to 39.47%, according to a Reuters poll.