TURKEY: Efforts to Boost FX Reserves Eyed as TRY Complicates Inflation Outlook

The CBRT have recently stepped up efforts to replenish its depleted FX reserves following the arrest of Istanbul mayor Imamoglu on March 19 and ensuing financial turmoil, though the effects are yet to be reflected in the latest data – gross FX reserves stood at $57.6bln in the week to 2 May, down for the 8th consecutive week and well below the $100bln peak in February.

• According to Bloomberg Economics, the CBRT’s net reserves have dropped by $47bln since March 19 to just $11.7bln, which prompted the central bank to raise the mandatory FX revenue conversion rate to 35% from 25%, while it also raised the FX deposit reserve required ratio by 200bps. They say the former will boost reserve inflows (net and gross) by about $2bln monthly for three months, while the latter will add $4bln to gross reserves.
• CBRT Governor Fatih Karahan said this week that “measures to increase interest in the Turkish lira will continue, and we will continue to support reserves with them.” The CBRT indirectly intervene in the FX market through state lenders who buy the local currency, and while the exact scale of those purchases are not publicly announced, estimates suggest the central bank has spent around $50bln since March.
• With lira stability clearly a near-term focus for policymakers, any additional efforts to reverse the drawdown in reserves will be watched, particularly given the recent episode of currency weakness has complicated the inflation outlook – the CBRT said recent depreciation affected core goods prices in March.
• Nonetheless, Goldman Sachs think that a flatter lira path than would have been the case before the sell-off in March will offset the impact of March's FX weakness. Meanwhile, JP Morgan maintain their end-2025 inflation forecast at 30.5%, noting that May CPI is likely to reflect FX pass through similar to April, with the depreciation of the lira set to have an impact on durable goods and particularly auto prices in May. Our EM Credit team note that the latest data looks neutral for credit, with a change in trajectory for FX reserves and year-end inflation key factors for spreads.