Turkey's Central Bank
The Turkish central bank took urgent action to defend the lira and crimp lax credit on Monday, but the announcement of unconventional measures ran into market
Market sources said that the bank had already begun selling dollars.
The bank sprang its announcement, including a signal that it will sell foreign currency, after the local lira fell to a record low value against the dollar.
There was scepticism on Turkish markets that spending reserves would prevent the lira from falling further.
The central bank announced that with immediate effect it was applying a "strong" tightening of monetary conditions.
"It's essential that the extra monetary tightening is strong, effective and temporary," the bank's governor Erdem Basci said in a statement.
The new measures would be applied for as long as the lira was under pressure.
The lira was being traded at 1.9466 to the dollar, having firmed from a record weak level of 1.9740 earlier in the day.
"In a world of higher yields (on bonds), the current ceiling of the interest rate corridor is unlikely to support the Turkish lira and spending reserves is unlikely to do the trick either," said Inan Demir, chief economist at Finansbank.
Demir said that defending the Turkish lira was "not a must for the central bank" and that allowing the lira to fall to help the competitive position of Turkish business would be a "perfectly legitimate stance as well."
The central bank had opened six FX (foreign exchange) auctions so far on Monday, selling a total of $2 billion, Finansbank said.
The central bank said that it would continue gradually to shift the way in which the flow of lira was made available to the Turkish financial sector.
This would be done by switching liquidity from net foreign assets to net domestic assets until the bank's next monetary policy committee meeting later this month.
"This strategy will not only soften extremely rapid credit growth but also support the value of the Turkish lira," a summary on the bank's website said.
"This is not the first time that the central bank has done this as we have seen two recent episodes of additional tightening on June 11 and between June 19-21 more recently," Sengul Dagdeviren at ING Bank based in Turkey told AFP.
"The move was not a surprise and shows that the central bank will continue to tame volatility within existing policy framework, ready to sell more FX (foreign exchange) via auctions too," she commented.
On the government debt market, Turkey's 10-year borrowing rate stood at 8.98 percent as the central bank announced its new tough action.
The yield had climbed to more than 9.0 percent on June 21, amid a wave of unprecedented protests against Prime Minister Recep Tayyip Erdogan and his Islamic-based government.
The borrowing rate was slightly above 6.0 percent in April.
The economy is ranked as the 17th biggest in the world, and the government hopes it will become the 10th-biggest within a decade.
But last month, the governing Justice and Development Party (AKP) was shaken by nationwide unrest, which Erdogan blamed various groups, including what he called an "interest rate lobby".
This referred to pressure in some quarters for a rise in interest rates to support the currency and retain foreign capital.
The central bank is independent of the government in setting monetary policy.
Andy Birch, senior economist at the US' IHS Global Insight, said the central bank continues to suggest that it would be keeping interest rates steady, "so as not to give into Erdogan's so-called foreign interest rate lobby."
But he predicted that with pressure steadily building to raise interest rates and the lira expected to remain unsteady, the bank "will at least raise the overnight lending rate" at its July 23 meeting, in order to relieve pressure on its monetary policy elsewhere.
Turkey, in common with many emerging economies is subject to signals from the US Federal Reserve bank that it will soon begin to wind down its special injections of money into the financial system to support the US economy.
This has caused some funds to be withdrawn from emerging economies.
"The pressure on the Turkish lira is solely in parallel to the emerging market pressure in the rest of the world," said Dagdeviren.
"We don't think local issues have been a significant decoupling factor so far for local markets," she added.