Turkish central bank resorts to currency swaps

In view of growing tensions on the financial markets, the Turkish central bank has once again resorted to a familiar instrument: Foreign exchange swaps with local banks. The aim is to manage liquidity and limit pressure on the currency. According to media reports, the central bank launched three swap auctions with a total volume of 10 billion US dollars on March 31. Demand remained high: bids totaling 8.62 billion dollars were received. In return, the central bank provided liquidity amounting to around 367 billion lira. Return of an old instrument The swaps enable banks to procure lira against US dollars in the short term - at an implicit interest rate of around 40 percent. This means that the conditions are at the same level as current refinancing costs. For the institutions, the longer terms offer additional flexibility compared to the overnight money market. The background to the measure is a noticeable outflow of capital since the beginning of the latest geopolitical escalation in the Middle East. Foreign investors have reduced their lira positions, while the central bank has already deployed more than 30 billion US dollars to stabilize the currency. Tensions in the liquidity system The interventions have side effects: The sale of foreign currency created a shortage of central bank lira in the banking system. The current swap transactions are intended to partially offset this imbalance. The central bank has also resorted to other instruments, including gold swaps and the sale of gold reserves. The fall in gold prices has recently increased the pressure on currency reserves. Despite the tense situation, observers do not yet see an acute financial crisis. The measures are part of active liquidity and reserve management. Nevertheless, the return to large-volume swap transactions is reminiscent of previous phases of increased instability. After the 2018 currency crisis, the central bank used similar instruments on a massive scale before largely scaling them back in 2024 as part of an economic policy realignment. There are now many indications that the scope for monetary policy is narrowing again - and the focus is shifting back to stabilizing the lira. The post Turkish central bank resorts to currency swaps appeared first on ostwirtschaft.de.