Turkey’s central bank may do more to curb market volatility

Turkey’s central bank said it would take additional actions if necessary to ensure the smooth functioning of financial markets, as it assesses risks to inflation from recent market developments.

The detention of Istanbul mayor Ekrem Imamoglu, President Tayyip Erdogan’s main political rival, which sparked biggest protests in Turkey in more than a decade last week, had caused strong market volatility and a major market sell-off.

The Monetary Policy Committee (MPC) held an interim meeting to review financial market conditions last week and has implemented measures to support its tight monetary stance, the bank said in a statement.

The bank suspended one-week repo auctions and hiked its overnight lending rate to 46 per cent in the interim meeting.

In a research note, Goldman Sachs said it expected the central bank to raise its policy rate by 350 basis points “to show its ability and willingness to implement its disinflation program”.

The moves last week effectively raised its average cost of funding by 350 basis points, the Wall Street bank said, and allowed for more time for internal discussion with other stakeholders prior to raising the main repo rate.

Turkish Finance Minister Mehmet Simsek and Central Bank Governor Fatih Karahan told international investors that they would do whatever was needed to tame market turmoil. On Monday, Istanbul stocks rebounded nearly 3 per cent while the lira held steady against the dollar.

The Borsa Istanbul benchmark index ended last week down 16.6 per cent, its worst drop since the global financial crisis in October 2008.

The index was up 2.45 per cent at 0802 GMT while the banking sub-index stands 2.7 per cent higher at 0802 GMT on Tuesday, after last week’s more than 26 per cent tumble.

The Treasury, central bank, the BDDK banking watchdog and capital markets board held a series of meetings with market actors over the weekend and announced several steps.

The measures had begun with the central bank raising the upper band of the interest rate corridor by 2 points to 46 per cent in an interim meeting last week, pausing funding from the policy rate.

While the central bank took a tightening step of close to 400 basis points, it also sold around $14 billion in foreign exchange. Additionally, it has started liquidity note issuance and TL-settled forward foreign exchange sales transactions.

Also, short selling was banned for one month on the Istanbul stock market.

Turkish stocks struggled to hold onto gains on Monday following last week’s slump with tensions in the country running high after a court jailed Istanbul Mayor Ekrem Imamoglu pending a trial.

The Borsa Istanbul benchmark index ended last week down 16.6 per cent, its worst drop since the global financial crisis in October 2008.

The index was up 1.87 per cent by 1430 GMT, paring earlier gains of as much as 3.8 per cent in a volatile session which often saw it dip into negative territory. The banking sub-index reversed a rise of 4.25 per cent to stand 0.12 per cent higher, after last week’s more than 26 per cent tumble.

A Turkish court on Sunday jailed Istanbul Mayor Ekrem Imamoglu, President Tayyip Erdogan’s main political rival, pending trial on corruption charges in a move that sparked the country’s biggest protests in more than a decade.

Imamoglu’s detention last Wednesday roiled markets, sending the lira, stocks and bonds sharply lower, and prompted an outcry from the main opposition party, European leaders and hundreds of thousands of protesters, who criticise the actions against him as politicised and undemocratic.