Turkish Central Bank Turns to Currency Swaps

In light of growing tensions in the financial markets, the Turkish Central Bank has once again turned to a familiar tool: 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 on March 31 with a total volume of $10 billion. Demand remained high: bids totaling $8.62 billion were received. In return, the central bank provided liquidity amounting to approximately 367 billion lira.

Return of an old instrument

The swaps enable banks to obtain lira in exchange for U.S. dollars on a short-term basis—at an implied interest rate of around 40 percent. This brings the terms in line with current refinancing costs. For the institutions, the longer maturities offer additional flexibility compared to the overnight money market.

The measure comes amid a noticeable outflow of capital since the start of the recent geopolitical escalation in the Middle East. Foreign investors have reduced their lira positions, while the central bank has already deployed more than $30 billion to stabilize the currency.

Tensions in the liquidity system

The interventions have side effects: the sale of foreign exchange has created a shortage of central bank lira in the banking system. The current swap transactions are intended to partially offset this imbalance.

In addition, the central bank has resorted to other instruments, including gold swaps and the sale of gold reserves. The recent decline in gold prices has further increased pressure on currency reserves. Despite the tense situation, observers do not currently foresee an acute financial crisis. The measures fall within the scope of active liquidity and reserve management.

Nevertheless, the return to large-scale swap transactions is reminiscent of earlier periods of heightened instability. Following the 2018 currency crisis, the central bank had made massive use of similar instruments before largely phasing them out as part of an economic policy realignment in 2024.

Now, there are many signs that monetary policy room for maneuver is narrowing once again—and that stabilizing the lira is coming back into sharper focus.