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CBRT’s Accumulation of Foreign Reserves Harming Efforts to Tighten MonPol

TURKEY
  • The CBRT has increased its reserves by approximately $20b since the beginning of June, which has led to funding made available through OMOs to turn negative for the first time since 2011, increasing the amount of TRY in the banking sector.
  • Ekonomi’s banking sources point out that the CBRT's need for reserve accumulation and the fact that it provides TRY to the market while obtaining reserves may weaken the effectiveness of the steps taken towards tightening monetary policy. Bloomberg reported this morning that the average rate on lira deposits of up to three months fell for a second week to 37.8% from 42%.
  • One banker warned the situation “has been contributing to dollarization by lowering deposit rates and reducing the attractiveness of TRY investment" while another local trader said “the sudden increase in the TRY in the system may create risks by increasing the demand for foreign currency."
  • TRY fell to a record low against USD following the June MPC meeting when rates were raised below the market consensus. USDTRY rose a further 2.2% yesterday, with prominent Hurriyet newspaper columnist Abdulkadir Selvi writing that his impression from "economic circles" is that the one-week repo rate will be raised to around 16.5-17% tomorrow, less than the Bloomberg median estimate of a hike to 18.5% and potentially explaining the move higher. This highlights the down-side risks to TRY of an inefficient transmission of tighter monetary policy.
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