(Bloomberg) — Excess liquidity in Turkey’s financial system swelled to a record one trillion lira ($28.2 billion) this week, as the central bank accelerated dollar purchases.
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Turkey has been building its foreign-exchange reserves to prevent the lira from appreciating, something it’s been wary of after jacking up interest rates, attracting foreign inflows and encouraging locals to de-dollarize. In doing so, the central bank unleashed billions of liras into the system, which has the potential to undermine efforts to keep financial conditions tight.
Burumcekci Research and Consulting economist Haluk Burumcekci calculated that authorities bought at least $7 billion last week.
Officials are keen to avert a liquidity build-up, which could add to inflationary pressures and lead to lower deposit rates, causing savers to seek alternatives for their funds such as the dollar.
The central bank has been a net lira borrower from the market since September via its open market operations. To drain lira liquidity, officials increased the amount lenders must hold as reserves at the central bank and they regularly conduct lira deposit auctions. In December, the bank said that liquidity conditions were being closely monitored.
“Previously, the central bank used liquidity bills to drain excess lira from the market resulting from its FX purchase auctions in 2007,” said Bloomberg Economics’ Selva Bahar Baziki. “We think that by choosing to implement tools with minimal liquidity impact this time around, policymakers have allowed an extended run of oversupply of liras, effectively easing financial conditions since mid-September.”
Turkey cut interest rates for the first time in almost two years in December, but retained a hawkish bias by narrowing the gap between its lending and borrowing rates. An official cautioned earlier this month against market expectations for sizable, consecutive reductions from here. The next rates decision is scheduled for Jan. 23.
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