Turkey's Central Bank Moves to Counter Falling Lira

Turkey's central bank on Monday took steps to support price and financial stability, after the Turkish lira's recent slump against the dollar.

In a statement on its website, the Central Bank of the Republic of Turkey, or CBRT, said it has tweaked its reserve option mechanism, lowering the upper limit for the foreign-exchange maintenance facility to 55% from 60% and reducing all tranches by 5 points.

The move would withdraw about 5.3 billion lira ($1.37 billion) of liquidity from the market and provide banks with approximately $1.4 billion of liquidity, the central bank said.

The reserve option mechanism allows banks to swap their dollars, euros and gold deposits for lira to meet currency reserve requirements.

"In the recent period, the markets have witnessed unsound price formations that are inconsistent with economic fundamentals," the central bank said.

In a separate statement, it said it has fixed the lira's rates against the dollar and the euro for repayments of rediscount credits for export and foreign-exchange earning services, which are due by Feb. 1, 2018. The central bank said the payments can be made in the national currency at a rate of 3.70 lira per dollar, 4.30 per euro and 4.80 for sterling, provided that they are paid at maturity.

After the announcement, the lira was trading 0.8% higher at TRY3.8570 against the dollar compared with TRY3.8823 before the moves were unveiled.

"As usual, the CBRT refuses to accept the obvious and instead plays around the edges with unorthodox solutions to a pretty orthodox problem--the economy is overheating after being over-stimulated," said Tim Ash of Bluebay Asset Management. "I doubt the actions of the CBRT will prove successful, and will only likely be a temporary fix, unless it accepts the fundamental reason for recent price action."

Write to Yeliz Candemir at yeliz.candemir@wsj.com

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November 06, 2017 04:48 ET (09:48 GMT)