On June 26, the Turkish lira experienced a significant decline of up to 3% against the US dollar, reaching a new record low. This occurred after the country's central bank implemented measures to simplify its policies and reports emerged that the bank had ceased using its reserves to support the lira, Reuters reports.
The lira's value weakened to 26.05 against the US currency, surpassing the previous week's historic low of 25.74. However, it later recovered slightly to 25.84.
Year-to-date, the lira has depreciated by 28%, largely due to concerns over President Tayyip Erdogan's unorthodox economic policies, including slashing interest rates despite high inflation. Recent notable developments include the central bank, under the leadership of new Governor Hafize Gaye Erkan, raising rates by 650 basis points to 15% on Thursday, although this fell short of market expectations.
Furthermore, the central bank initiated a rollback of various regulations adopted since 2021, which aimed to heavily regulate debt, credit, and foreign exchange markets. These measures were intended to encourage holding the lira.
Prior to the election, the central bank utilized its reserves to protect the lira's value, leading to a historic low in early June with net reserves at minus $5.7bn. However, reserves subsequently recovered in the following two weeks.
The recent policy simplification steps were intended to promote market freedom and ensure stability, as stated by the central bank. A senior official confirmed that the bank had adjusted its foreign exchange policy and clarified that the central bank was no longer intervening in the exchange rate by selling foreign currency after the interest rate decision. This implied that the exchange rate was determined solely by the free market, and a period of reserve accumulation had commenced.
Bankers echoed this sentiment, stating that the central bank had completely halted the use of reserves. It was noted that the lira's value was no longer being defended through reserves, and the central bank's foreign exchange position indicated daily increases of $1-2bn, indicating a change in strategy.
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