Turkish state banks sold more than $1 billion on Thursday and overnight, sources said, helping the lira to firm more than 2 per cent at one stage and stem declines triggered by a decision this week to re-run Istanbul's mayoral election.
Ziraat Bank, Turkey's largest lender by asset size, was one of the banks that sold dollars to support the lira, according to the sources familiar with the matter. Ziraat Bank was not immediately available for comment.
The lira has lost as much as 15 per cent against the dollar this year, with the latest weakness driven by investor concerns over Monday's decision to re-run a mayoral election in Istanbul that was narrowly won by the main opposition party.
Electoral authorities cancelled the result of the March 31 vote in Turkey's largest city and commercial hub after weeks of appeals from President Tayyip Erdogan's defeated AK Party.
On Thursday, Turkey's central bank effectively tightened policy by funding the market through a higher rate and took additional liquidity steps to bolster the lira.
“The steady trend of lira depreciation could potentially push inflation significantly higher than expected even beyond 2019. The central bank move has had markedly limited positive impact on the currency this time around,” Yatirim Finansman, the Instanbul-based brokerage house, said in a note to clients.
“If CBRT (Central Bank of the Republic of Turkey) wants to stop (lira) volatility effectively, it might have to introduce monetary tightening.”
Investors fear that the decision to repeat the Istanbul election on June 23 will add nearly two months of uncertainty over Turkey's plans to rebalance and stabilise the economy.
Turkish banks have also told foreign investors they were in no rush to sell problem loans on their books, and were focused on restructuring them, three people present at a meeting discussing bad debt on Thursday in Istanbul told Reuters.
Deutsche Bank, Cerberus, Goldman Sachs, Bain Capital and the European Bank for Reconstruction and Development attended the meeting to discuss the possible sale of problem loans, the attendees said.
Economists have expressed concerns about the transparency of non-performing loans held by Turkish banks, which surged after last year's lira crisis.