The Turkish lira weakened as much as 2.6% on Wednesday, eating further into the huge gains made the previous week, as worries persisted over soaring inflation and unorthodox monetary policy.
There was market little reaction to the central bank’s (CBRT) 2022 policy document, in which it said it will monitor risks related to the foreign exchange market and do what is necessary to ensure it runs smoothly.
The lira slipped as far as 12.11 against the dollar and traded at 12.03 by 0742 GMT. Despite surging more than 50% last week following state-backed market interventions, it has lost 39% of its value this year.
“The CBRT has no commitment to any exchange rate level and will not conduct FX buying or selling transactions to determine the level or direction of the exchange rates,” the bank said.
It said it will use reserve requirements to support its pursuit of price and financial stability objectives, adding that negotiations to sign swap agreements with other central banks would continue.
The lira strengthened 50% last week following billions of dollars worth of state-backed market interventions and a government move to cover FX losses on certain deposits, restoring the currency back to its mid-November levels.
President Tayyip Erdogan unveiled last week an incentive for savers to convert forex deposits into lira, under which the Treasury and Central Bank will reimburse losses incurred due to any erosion in lira value during the deposit period.
The lira hit an all-time low of 18.4 to the dollar before Erdogan’s announcement, after weakening for months due to fears of surging inflation following a series of interest rate cuts sought by the president.
Annual inflation is forecast to have hit 30.6% in December, a Reuters poll found, breaching the 30% level for the first time since May 2003 – six months after Erdogan’s AK Party first came to power.
According to traders’ calculations, the central bank’s net forex reserves, excluding swaps, fell some $8 billion last week, with most of the fall in the first two days of the week. They were down $17-$18 billion as of last Friday since the start of the month, when the bank began its direct interventions.
The central bank has cut its policy rates by 500 basis points to 14% since September.