Turkey's central bank tries to curb lira fall

Turkish President Recep Tayyip Erdogan.   Matt Dunham- WPA Pool  Getty Images

The Lira has lost more that 45 percent of its value against dollar this year not only because of the latest diplomatic rift, bus also due to the Turkish economy showing signs of vulnerability after years of continued growth.

On Friday that relentless slide turned into a crash: the lira dropped as much as 18 per cent, hitting USA and European stocks as investors took fright over banks' exposure to Turkey.

The pressure spread across emerging-market assets and the South African rand hit the lowest since June 2016. Currency markets can also hasten these shifts, for example in 1992 when the United Kingdom crashed out of Europe's fixed currency regime, the Exchange Rate Mechanism, after sustained runs on sterling in currency markets.

In its first statement since what was dubbed "Black Friday" in Turkey, the central bank said it was ready to take "all necessary measures" to ensure financial stability, promising to provide banks with "all the liquidity" they need. Meanwhile there are concerns about political interference with the "independent " central bank, especially as the president appointed his son-in-law as finance minister.

They said the bank's decision could be the first step towards tightening policy through the use of an interest rate corridor, an instrument used in previous years, rather than an increase in the benchmark rate.

Oil prices edged lower, with Brent crude off 11 cents at $72.72 a barrel and USA crude as much as 30 cents lower at $67.33.

The reserve requirement moves will free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system, the bank said.

"While maintaining flexibility of the exchange, it was also necessary to keep a bottom line mentality", the central bank said.

Isik said the lira's current levels would add between 4 and 5 percentage points to headline inflation in coming months, pushing it up to around 21 percent in September from almost 16 percent last month.

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"We will give our answer, by shifting to new markets, new partnerships and new alliances", said Erdogan, who in recent years has built closer ties with countries in Latin America, Africa and Asia. "These banks are thought to have the greatest exposure to Turkish debt and their loans are unhedged".

The Toronto Stock Exchange's S&P/TSX composite index was down 9.04 points, or 0.06 per cent, at 16,317.47.

The lira found just a sliver of support when Turkish Finance Minister Berat Albayrak said the country had drafted an action plan to ease investor concerns and the banking watchdog said it limited swap transactions.

Heightened global tensions didn't do much to support gold prices, which were trading at $US1209.39 an ounce, down $2.31, as strength in the U.S. dollar outweighed the precious metal's safe-haven appeal to investors.

Market analysts broadly welcomed his comments but said investors wanted to see action.

The underlying economic cause for the crisis is simply a lack of confidence in Turkey's economy.

In the interview with Hurriyet newspaper, Albayrak described the lira's weakness as "an attack" - echoing Erdogan, who is his father-in-law.

"The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis", said Andrew Kenningham, chief global economist at Capital Economics.

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