New borrowing limits for Turkish banks, currency slides

New borrowing limits for Turkish banks, currency slides

Last week, Turkey’s central bank announced it was halving the limit that banks could borrow from one another – an

Photo: Getty

Photo: Getty

Last week, Turkey’s central bank announced it was halving the limit that banks could borrow from one another – an activity known as interbank lending – to $2.9 billion. The new limit is aimed at arresting the country’s currency slide by encouraging banks to borrow from overseas institutions. It’s hoped this will increase demand for the Turkish lira and therefore boost its value. The measures take effect on Monday.

Turkey’s currency has fallen 12 per cent against the US dollar since Jan. 1, making it 2017’s worst performing currency thus far. On Friday, President Erdogan went to the extraordinary step of asking Turks to exchange their foreign bills for lira to prevent further declines.

Increasing political volatility has spooked investors, accelerating the currency slide. The economy has slumped since July’s failed coup, contracting by 2.7% in the third quarter of 2016. This has been compounded by domestic security concerns and the impending political showdown over an April referendum designed to concentrate President Erdogan’s power.

Turkey’s central bank raised interest rates in November but surprisingly left them unchanged in December. Economists have urged the bank to increase rates again at its Jan. 24 meeting to firm up the currency; however, political pressure may prevent this. President Erdogan has repeatedly called for low interest rates to boost the economy, casting doubt over the central bank’s independence.