Turkish banking watchdog raises limits for foreign currency transactions

Turkey’s banking watchdog (BDDK) raised the limits for banks’ foreign currency transactions with foreign entities on Friday, allowing increased access to the market.

The BDDK said it relaxed the limit for banks’ foreign-exchange swap, forward and option transactions with foreign entities to 10 percent of a bank’s equity, from 1 percent previously, reversing an April move.

The Turkish lira firmed more than 1 percent against the US dollar following the move, and stood at 7.5650 at 0838 GMT while the banking index gained more than 3 percent.

The BDDK also reversed a similar move earlier this year, by increasing the amount of lira swap and derivative products sold by banks to non-residents as the economy recovers following a slowdown at the height of the coronavirus outbreak.
In a surprise move on Thursday, Turkey’s central bank hiked interest rates by 200 basis points to 10.25 percent, tightening policy for the first time in two years.

The central bank, which has been funding the market through traditional repos with a variable rate, opened a 5 billion lira repo auction with the volume method on Friday to fund the market through its benchmark rate.

“The central bank did not shift all the funding to its policy rate yet. We understand that the policy rate and the overnight lending rate (11.75 percent) will also be used to fund the market,” a banker said, expecting a slight rise in the average cost of funding towards 11 percent.

After the policy tightening move, Turkey’s central bank raised the lira forex swap market interest rate to 10.25 percent from a previous 9.75 percent on Friday.