Turkey lira at new low after rollback of bank rules

ISTANBUL (Reuters) – The Turkish lira slid 1.8% to a fresh record low against the U.S. dollar on Monday after the central bank took steps to simplify rules governing lenders’ holdings and foreign deposits, following its sharp interest rate hike last week.

The lira fell to 25.76 against the dollar, surpassing last week’s all-time low of 25.74.

It is down 27% so far this year, largely after the re-election in late May of President Tayyip Erdogan who has since moved to backtrack on his years of unorthodox economic policy including slashing rates despite soaring inflation.

Two big steps were taken in recent days: the central bank under new Governor Hafize Gaye Erkan raised rates by 650 basis points to 15% on Thursday, a substantial tightening even though it fell short of market expectations.

Then on Sunday the central bank began rolling back parts of the dozens of rules and regulations it had adopted since 2021 that left debt, credit and forex markets heavily state managed – and that were meant to encourage lira holdings.

The steps were meant to free up markets and ensure stability, the bank said at the weekend.

According to the official gazette, the securities maintenance ratio that banks are required to allocate to their foreign currency deposit was reduced to 5% from 10%.

Securities that banks must maintain ranged between 3% and 12% of their lira deposits, under the new standard, compared to between 3% and 17% previously.

The new regulation also said banks whose lira deposits are less than 57% of total deposits will have to hold an additional seven percentage points of securities, compared to the previous seven additional points applied to banks which held less than 60% lira deposits.

“Ratios were slowly lowered, allowing banks to adjust their positions slowly and not triggering a rapid rise in interest rates, a slight relaxation of the rules would give banks room and time to maneuver about their bond portfolios,” said Enver Erkan, Chief economist at Dinamik Yatirim.

“It is a comforting and positive development for the sector.”

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