(Bloomberg) -- Turkey’s central bank will start buying liras through the nation’s main clearing house, expanding the ways it can reduce excess liquidity and maintain high borrowing costs.
The bank would start placing lira buying orders at its overnight borrowing rate of 47%, according to a document it sent to Turkey’s Settlement and Custody Bank known as Takasbank and seen by Bloomberg.
The liquidity operation went into effect on Wednesday, a person familiar with the matter told Bloomberg, asking not to be identified because they weren’t authorized to speak to media.
The central bank declined to comment.
The move diversifies the tools at the central bank’s disposal to mop up unwanted lira liquidity, a step telegraphed by Governor Fatih Karahan as recently as last week. A failure to keep the amount of currency available to banks under control could result in lower deposit rates, contradicting Karahan’s tight policy stance.
Turkish authorities more than quadrupled the benchmark rate over the past year to 50% now, spurring demand for lira assets. That and an increasing foreign investor demand resulted in a lira glut, which saw the average interest rate on deposits of up to three months fall for three weeks to 59.1% as of Aug. 2, according to official data compiled by Bloomberg.
The monetary authority has already raised the amount of liras commercial lenders are required to park at the central bank to ease some of the glut. Officials also started holding auctions to buy liras from banks last December.
“As foreign inflows into Turkish rates market continue, the central bank is challenged by excess Turkish liquidity in money market,” said Okan Ertem, a senior economist at Turk Ekonomi Bankasi AS. While the “easiest and most effective way” to deal with the excess lira is through increasing required reserves, according to Ertem, those ratios are already at historical highs.
“That’s why the central bank is looking for alternative ways,” he said.
--With assistance from Tugce Ozsoy.
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