Turkish Central Bank Urges Banks to Avoid Creating Forex Demand Ahead of Elections, Sources Say

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Turkey's central bank has urged local banks to focus on monthly conversions of forex deposits to lira and avoid measures that could create demand for foreign currency ahead of the May elections, according to anonymous bankers. The lira is currently at an all-time low, and authorities are discouraging forex holdings as the central bank pursues unorthodox policies of cutting interest rates despite high inflation. Banks are estimated to be above or close to the newly determined 60% conversion rate, and have monthly targets to convert forex into lira. One private sector source calculated that the central bank could receive a net reserve contribution of up to $5bn every month for the next six months if all banks converted forex into lira.

The central bank's messages have been perceived as a warning to lenders not to create obstacles to its forex policy, particularly with the upcoming elections, where President Tayyip Erdogan is facing the biggest political challenge of his two decades in power. However, expectations that the lira will weaken after the election alone is sufficient to create demand for foreign currency.

The volume of long-term, low interest rate treasury bonds that the banking sector is required to hold has reached 350 billion lira, and the sector has started to conduct stress tests on possible currency and interest rate shocks after the election. At present, the interest rate offered by banks for high volume lira deposits is around 32-33%, but the rates on investment-oriented loans are close to single digits, which businesses say they cannot access.

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