The Turkish lira hit its weakest level against the dollar in nearly a month on Tuesday after the central bank reduced the required reserves ratio for banks with loan growth rates above 10% in a move investors saw encouraging increased lending.
Concerns about developments in Syria were also weighing on market sentiment after Ankara said on Monday an air strike on a Turkish military convoy in northwest Syria killed three civilians.
The lira weakened as far as 5.7145 to the dollar, 7% weaker than at the end of last year. A currency crisis wiped 30% off the lira's value in 2018, tipping the economy into a recession.
"The Turkish Central Bank decision and Syria worries are the biggest two reasons for the lira weakness," said one foreign exchange trader.
Economists said rapid loan growth could fuel imports and swell the current account deficit, long a headache for energy import-dependent Turkey.
For banks with a loan growth rate of 10%-20%, the central bank lowered the reserve requirement ratio for deposits of up to a 3-month maturity to 2% from 7% previously. It lowered the ratio to 2% for deposits of up to a 6-month maturity from 4%. The bank also raised the interest rate on lira-denominated required reserves to 15% from 13% for banks with a 10-20% loan growth rate, and set it at 5% for other banks. Market direction could also be affected by a treasury tap of a 5-year CPI-indexed bond and the issue of a lira-denominated sukuk.
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