Turkey is broadening its toolkit to protect the lira from volatility triggered by the Iran conflict, with the central bank considering the use of its substantial gold reserves as part of these efforts. According to sources familiar with the matter, the Central Bank of the Republic of Turkey has held internal discussions about conducting gold-for-foreign exchange swap transactions in London markets. Gold held at the Bank of England could potentially be utilized for foreign exchange interventions.

Since the outbreak of the Iran conflict, international oil prices have surged from around $70 per barrel to over $100 per barrel. Turkey, which is almost entirely dependent on imported oil and natural gas, faces severe inflationary pressure and balance of payments strain. The country's inflation rate currently stands at 31.5%, among the highest globally, as the government struggles to maintain its anti-inflation strategy centered on keeping the lira's real exchange rate strong.

As of the latest data, the Turkish lira has weakened by 0.1% against the U.S. dollar. So far this year, the currency has depreciated at an average daily rate of approximately 0.05%, showing a persistent and steady decline.

Over the past decade, Turkey has been one of the world's most active gold buyers, with its leadership consistently working to reduce reliance on U.S. dollar-denominated assets. As of early March, the central bank's gold reserves are valued at approximately $135 billion.

J.P. Morgan economist Fatih Akcelik noted in a Tuesday report that Turkey is estimated to hold around $30 billion worth of gold at the Bank of England. These assets "face no logistical constraints and can be directly used by the central bank for foreign exchange intervention," making London-held gold Turkey's most operable emergency reserve asset.

Before turning to gold reserves, Turkish policymakers have already deployed multiple countermeasures. Authorities have tightened liquidity to raise lira funding costs and directed state-owned banks to intervene in currency markets.

Simultaneously, the central bank has continued selling its holdings of foreign government bonds, including U.S. Treasuries. Sources estimate that sales over recent weeks have reached approximately $16 billion. As of the end of January, Turkey's holdings of U.S. Treasury securities had fallen to below $17 billion, significantly lower than the peak of $82 billion in 2015.

On interest rates, Turkey's benchmark rate remains at 37%, but the central bank paused funding through this rate window in early March, switching to a more expensive financing channel with a 40% rate. Market expectations for rate movements have become highly volatile, with traders now pricing in a 100 basis point rate hike next month.

Pressure signals are emerging across multiple fronts. Data released by the Turkish central bank on Monday showed that foreign investors sold Turkish government bonds at the fastest pace on record during the week ending March 13.

Tension is also visible at the street level. This week, currency exchange dealers in Istanbul's Grand Bazaar have been selling U.S. dollars at rates above the interbank exchange rate, reflecting increased demand for hard currency among local residents.