Turkish CB’s total reserves rise to $134.5b, highest level since 2014

The Turkish central bank’s total reserves rose $6 billion last week to $134.5 billion, the highest since September 2014, four bankers’ calculations showed on Tuesday, resuming an uptrend since the bank adopted a more orthodox monetary policy after May elections.

Since June, when President Tayyip Erdogan appointed former Wall Street banker Hafize Gaye Erkan as its governor, the bank has embarked on a 2,650 basis-point tightening cycle - including hikes of 500 basis points in each of the last two months.

Total reserves are now $36 billion higher than the $98.5 billion level at the end of May, following the elections.

The rise came after Turkey borrowed $2.5 billion in a 5-year sukuk at a sharply lower 8.5 per cent yield this month, marking its first international bond issue since the elections. Those funds entered Treasury accounts on Nov.14.

Turkey’s credit default swaps (CDS), which rose to 425 basis points at the start of November amid geopolitical concerns, fell on Monday. The 5-year CDS finished the day at 343, down from 349 on Friday, data from S&P Global Market Intelligence showed.

During the election period, CDS were higher than 700 basis points.

Meanwhile the lira has continued to weaken and stood at 28.8 against the dollar on Tuesday, 35 per cent weaker than at the end of last year. It hit a record low of 28.9 last week.

Market attention is now focused on the central bank’s policy-setting meeting on Thursday. It is expected to raise its policy rate by 250 basis points to 37.5 per cent, a Reuters poll showed on Monday.

Under measures introduced last year, the central bank boosted reserves by buying 40 per cent of exporters’ forex income, amounting to around $100 billion annually. This and more was then sold by the bank to support the lira in a practice halted since the elections.

Meanwhile Turkey’s central bank raised its year-end inflation forecasts for this year and next to 65 per cent and 36 per cent respectively, Governor Hafize Gaye Erkan said on Nov. 2, vowing to continue gradual monetary tightening.

The bank’s previous inflation report three months ago forecast year-end inflation of 58 per cent in 2023 and 33 per cent next year.

Inflation hit a 24-year peak of 85 per cent last year and surged again in recent months as the lira weakened for a third year in a row in the wake of an unorthodox rate-cutting policy backed by President Tayyip Erdogan despite soaring prices.

Since Erkan was appointed governor in June, the bank has implemented an abrupt U-turn in policy, raising interest rates by 2,650 basis points as part of a wider policy shift towards greater orthodoxy after May elections.

“Getting high and volatile inflation under control will be a long and difficult process. We will continue to use all tools available in a determined way to ensure disinflation,” Erkan said in a speech.

She told a press conference to present the central bank’s (CBRT) inflation report that disinflation would start after it peaked at around 70 per cent-75 per cent in May and that monetary tightening would continue until there was a visible improvement in inflation.

“Pretty consistent message being sent now from the CBRT,” said Timothy Ash, senior strategist at BlueBay Asset Management, referring to the central bank.

“Trust us, we are tightening and more should happen after the local elections and inflation should get down to a 30% handle at end of 2024,” he said of the bank’s message.

The lira traded at 28.3460 at 0921 GMT, little changed on the day. It has weakened some 33 per cent this year. The central bank raised its policy rate by 500 basis points to 35 per cent earlier in November, tightening aggressively for a third straight month as it steps up efforts to rein in inflation, which hit 61.5 per cent in September.

Erkan said the rise in inflation was driven by large shocks happening simultaneously and their inflation impact was largely completed, adding that the bank maintained a 5 per cent medium-term target.

President Tayyip Erdogan chose former Wall Street banker Erkan as central bank chief after his May re-election. She has led a policy U-turn to relieve an economy strained by depleted foreign exchange reserves and surging inflation expectations.

Under former Governor Sahap Kavcioglu, the central bank slashed its policy rate to 8.5 per cent from 19 per cent in 2021, based on Erdogan’s economic programme. The cuts sparked a currency crisis and the lira weakened 44 per cent in 2021 and 30 per cent in 2022.

In past years, Erdogan has repeatedly criticised tight monetary policy, describing himself as an enemy of interest rates, but he has recently said tight policy would help bring down inflation.