Turkey’s central bank is weighing emergency measures to defend the lira against mounting volatility triggered by the war with Iran, including tapping into its vast gold reserves through swap transactions in the London market, according to people familiar with the deliberations.
The bank has held internal discussions about conducting gold-for-foreign currency swaps, a move that would allow it to mobilise hard currency without directly selling its gold holdings. Turkey is estimated to hold around $30 billion of its reserves at the Bank of England — assets that a JPMorgan economist said the central bank “may decide to use for FX intervention purposes without logistical constraints.” The central bank declined to comment. Gold prices slipped 0.7% following reports of the potential step.
Turkey’s total gold reserves stood at approximately $135 billion as of early March, the product of an aggressive decade-long accumulation strategy driven by a policy of reducing exposure to US dollar-denominated assets. The scale of those holdings now makes gold a natural first line of defence as pressure on the lira intensifies.
The country is acutely exposed to the Iran conflict’s economic aftershocks. As a near-total importer of oil and gas, Turkey faces severe inflation and balance-of-payments risks the longer the war continues — factors already straining a disinflation strategy built around preventing the lira from depreciating faster than monthly inflation. Oil prices have surged from around $70 to above $100 a barrel since hostilities began, compounding the challenge for policymakers who are already contending with an inflation rate of 31.5% — one of the highest in the world.
The central bank’s crisis response so far has included tightening liquidity conditions, raising the cost of lira funding, and directing state-run lenders to intervene directly in currency markets. It has also been offloading foreign-currency bond holdings, including an estimated $16 billion in US Treasury sales in recent weeks, reducing Turkey’s Treasury holdings to below $17 billion — down sharply from a peak of $82 billion in 2015. Foreign investors, meanwhile, have been exiting Turkish government bonds at the fastest pace on record, according to central bank data covering the week through 13 March.
Street-level signs of stress are also emerging. Traders at Istanbul’s Grand Bazaar were this week selling dollars at a premium to the interbank rate, a visible indicator of rising local demand for hard currency.
Interest-rate expectations have shifted significantly. Traders are now pricing in a 100 basis point rate increase at next month’s meeting. Turkey’s benchmark rate currently stands at 37%, though the central bank suspended lending from that rate at the start of March in favour of a costlier 40% funding window. The lira was trading at 44.35 per dollar on Tuesday afternoon in Istanbul, continuing a steady decline that has averaged approximately 0.05% per day this year.
