Central Bank trims forex selling auctions as lira hits lowest in 4.5 months

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The Turkish Lira has gained the most value since Dec. 25, 2013, falling below 2.08 against the U.S. dollar, prompting the Central Bank to announce it will halve its daily foreign exchange selling auction amount.

Buoyed by signs of conciliation in Ukraine and the U.S. Fed Reserve chief’s comments that were perceived as positive, the lira/dollar ratio, which started off the day at around 2.084, hit 2.075 by the afternoon.

The currency has not advanced this much since Dec. 25, the day when the second graft probe was set to be launched.

Encouraged by the firm trading of the lira in recent weeks, the Central Bank yesterday announced it will cut its minimum daily forex auction amount from $40 million to $20 million as of today.

“Considering the positive developments in balance of payments, daily forex auction amount will be reduced to a minimum of $20 million from $40 million as of [today],” the bank said in the statement released May 8.

The lira has been hovering strongly since May 7, following conciliatory statements by Russian President Vladimir Putin, who told pro-Russian rebels fighting in the east of Ukraine to halt plans for independence referendums.

Putin also said his troops had pulled back from the border, but both NATO and Washington said there was no evidence of a withdrawal.

Markets also took heart after Federal Reserve Chair Janet Yellen told Congress the U.S. economy was on track for “solid growth” in the second quarter, and that the stimulus taper would continue steadily.
The Turkish Central Bank has been under mounting pressure to reduce interest rates, particularly from the government, which blames high rates for hampering growth.

Even though Central Bank Gov. Erdem Başçı gave signals of a “moderate and gradual cut,” the bank said balancing inflation was its main focus and would ease it policy only after seeing a remarkable progress in prices.

‘Slightly lower rate’

Addressing a conference organized by Mitsubishi UFJ Securities in London, Deputy Central Bank Gov. Turalay Kenç reiterated Başçı’s remarks, also not ruling out the possibility of a slightly lower policy rate.

“The good thing about the inflation outlook is that though inflation expectations have deteriorated, the deterioration is really quite … moderate,” Kenç said May 8.

“We will maintain a tight monetary policy until there is a significant improvement in the inflation outlook,” he said, but added: “A slightly lower policy rate would still give you a tight monetary policy stance.”

Inflation rose more than expected in April, a year-on-year increase of 9.38 percent, staying stubbornly above the Central Bank’s newly-raised 7.6 percent forecast for the end of the year.

Kenç also said the bank was considering resuming the payment of interest on lenders’ required reserves, which it stopped at the end of 2010, in a further step to ease its tight policy, although he said any such move would be measured.

“If we pay interest on reserves that will also be easing and we are trying to find the right time to do that,” he said.

“Whatever we do will be measured because there is a fine balance between the banks’ reserve requirements and the forex liabilities. Any rate higher than 3 percent will disturb that balance,” Kenç said.

He reiterated that the bank expected Turkey’s economic growth in 2014 to be close to 4 percent and to see a significant improvement in the current account deficit, which is the country’s main economic weakness.

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