Turkey’s central bank on Saturday announced a series of measures meant to protect the Turkish economy from the potentially negative impact of an expected rise in U.S. interest rates.
The central bank is forcing commercial lenders to increase the average maturity of their foreign-exchange denominated debt while boosting the banks’ foreign-exchange transaction limits with the regulatory body, the bank said on its website. It is also increasing the interest payments on lenders’ lira reserves held at the regulatory body to reduce their intermediation costs.
With a current-account deficit forecast to be about 5 percent of gross domestic product by year-end, Turkey is highly dependent on foreign portfolio flows to cover its external imbalances. With Saturday’s measures, Turkey’s banking sector will be able to pay all of its short-term foreign-exchange liabilities by tapping its own foreign exchange, gold assets held at the central bank and by borrowing through the regulatory body’s so-called “FX deposit” facility, the bank said.
The measures mark the first major step in the implementation of the central bank’s “Road Map During the Normalization of Global Monetary Policies.” Governor Erdem Basci said last month that the first rate increase by the Federal Reserve would likely be followed by reduced volatility in U.S. Treasury yields, which in turn would require a shift in Turkey’s monetary policy. The bank later laid out a plan that would move the monetary policy framework to a single-rate one from the existing corridor of three main interest rates, while providing some protection for the lira.
The lira weakened more than 20 percent this year to 2.9237 per dollar on Friday to become the third-worst performing currency among emerging market peers.