Central bank announcement aids little to TL

Turkish President Erdogan met with central bank Governor Kavcioglu in the afternoon of the worst day for the Turkish Lira. The meeting was held as TL dropped by more than 15% earlier in the day, trading 8.8% lower at 12.50 per dollar as of 4:55 p.m. local time in Istanbul according to Bloomberg.

In the following hour the central bank issued a note saying the bank could intervene the market only during excessive volatility as it The following hour showed a central bank statement as the currency regime is a free float.

The note was short saying:

“The Central Bank of the Republic of Turkey implements floating exchange rate regime and has no commitment to any exchange rate level. Exchange rates are determined by supply and demand conditions according to free market dynamics. Under certain conditions, the Central Bank may only intervene in excessive volatility without aiming any permanent direction. In FX markets, unhealthy price formations are being observed that are unrealistic and completely detached from economic fundamentals.”

The central bank’s net fx reserves stripped from swaps stand at around a negative of USD35 bn recently which has shrunk from USD 57 bn of end 3Q20. Stronger export and tourism revenues along with the IMF cash of USD6bn have helped with the improvement as the gross reserves improved up to USD123 bn. Hence, the central bank has room for market intervention to a tune of circa USD 9-10 bn.

Yet, the real story behind the TL depreciations that is extreme negative real rates are supported by President Erdogan as the new economic policy for Turkey.  His declaration that he would favor lower rates have killed hopes for a forced rate hike in the coming months and triggered speculations about currency controls at the worst case. Hence even if the central bank steps in the fx market perhaps transparently this time aro8nd will do little to lift the value of the Turkish lira.