Turkish banks on August 24 stopped charging fees on physical FX withdrawals reasoning that “the practice has hurt confidence in the health of the financial system”, Haberturk reported.

Turkish banks started charging the fees on foreign exchange cash withdrawals on August 13, nine days after the central bank permitted such commissions. The banks said their physical FX costs had risen due to shrinking tourism receipts and less border trade amid the coronavirus (COVID-19) crisis.

For those familiar with the Turkish economy administration’s ‘trial and error’ approach to policymaking, the fact that the FX withdrawal fees lasted less than two weeks was no big surprise.

According to the latest available data from the central bank, resident real persons’ FX deposits declined by $2bn to $134bn as of August 14 from a record high of $136bn as of August 7.

Data is sensitive to changes in the EUR/USD and gold (XAU)/USD rate pairs, but the move to scrap the fees may suggest that a good deal of Turks withdrew their FX from banks after the introduction of the commission.

Turks still pay a 1% Tobin Tax when they buy FX or gold via the banking system, while they also face a one-day settlement delay on individual purchases of more than $100,000 in FX.

Earlier this month, the Tobin Tax was scrapped for foreign financial institutions.

Meanwhile, the central bank continues with its backdoor tightening measures.

On August 24, the central bank said that it “may reduce lira funding to the Borsa Istanbul (BIST) repo market”.

The authority continues dealing with the ongoing currency shock like a boxer whose hands are tied behind his back. Landing a good punch with a formal interest rate hike have for now been disallowed by the Erdogan palace it would seem.

After the central bank started taking measures to cut cheap liquidity channels at the beginning of August, overnight interest rates on the Borsa Istanbul repo market gradually increased to 9.75%, the central bank’s overnight funding rate.

Now, the central bank is messaging the banks that it wants repo rates on the Borsa Istanbul market to approach 11.25%, the late liquidity window rate and the upper boundary of the so-called rate corridor.

The first reaction was seen in the central bank’s one-month repo auctions conducted on August 24 according to the traditional auction method, in which banks set the rates with their bids. Rates, which have shaped around 11.25%, jumped to 11.41%.

This does not necessarily mean at first glance that banks expect a rate hike, but the coming days should be observed carefully, @e507 noted.

The daily TRY10bn provided via the one-month repo auction is a small amount in the central bank’s daily funding, which stands above TRY200bn, but the approach tries to send the message that it is open to rate hikes and allows market makers to set the rates.

Later on in the day, the central bank activated its late liquidity window to provide a symbolic TRY1bn to the banks while the Borsa Istanbul repo rates rose to 10.03%.

As a result of the backdoor measures, the central bank’s weighted average cost of funding, which excludes USD- TRY swaps with local banks, reached 9.52% as of August 21 from 7.34% as of July 16.

In the latest USD/TRY swap auction held on August 17, the implied lira rate reached 10.95% from 8.23% in the auction held on August 5.

The next scheduled MPC meeting will be held on September 24. An emergency meeting remains a possibility depending on the course the lira takes from here. It was trading at around 7.37 to the dollar late in the evening on August 24, short of its 7.40 all-time low.

Government-run lenders are still active in the USD/TRY market in support of the lira.

As a result of the tightening measures, loan rates have been rising since the beginning of August, but deposit rates are still well below official inflation.

Domestic government bond yields are also on the rise, although it is hard to call the market for these bonds “a market” due to systematic interventions made since November 2018. The latest took the form of an asset ratio imposed on local banks. Despite tightening steps, the asset ratio remains in effect with a limited downgrade.

Loan growth and the lira supply boom is losing some momentum, but the indicators for these still remain at incredible levels.

According to the latest available data, commercial loans growth slowed as of August 14 but consumer loans growth remained high.