The Turkish lira crashed as much as 7% in just a few minutes to a new record near 15 to the dollar on Monday, gripped by worries over President Tayyip Erdogan’s risky new economic policy and prospects of another interest rate cut on Thursday.
The sudden slide left the currency with half the value that it had at the end of last year, fuelling inflation in a big emerging market economy which depends heavily on imports.
The central bank (CBT) previously kept the lira (TRY) below the 14.0 level, intervening in the foreign exchange market three times in the last two weeks by selling dollars. On Monday it had not announced any interventions by 0815 GMT.
“Last week’s apparent relative stability of TRY was artificial and non-sustainable. Now we see the build-up pressure unfolding, driving lira weakness to the next level,” Commerzbank said in a note. “Any further attempts of CBT to stabilize TRY by interventions is probably bound to fail.”
The lira slid as far as 14.99 against the U.S. currency in thin market liquidity, from Friday’s close of 13.889. By 0815 GMT, it had trimmed losses in volatile trading and stood at 14.44.
Turkey’s central bank, under pressure from Erdogan, is expected to cut its policy rate by 100 basis points to 14% this week, a Reuters poll showed on Friday, despite inflation soaring to 21.3% last month.
However, there was scepticism about whether the bank would go through with it given the volatility.
“Honestly I don’t think they can carry out another 100 bps cut this week. The lira has been very volatile for the past few weeks, and the S&P has downgraded to a negative outlook. The markets will have very little tolerance to such a move,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
OUTLOOK REVISED TO NEGATIVE
The central bank has slashed its policy rate by 400 basis points since September, driving the concerns of investors and savers. For Turks, the sharp depreciation has upended budgets and future spending plans.
Late on Friday, ratings agency S&P affirmed Turkey’s long-term foreign currency rating at “B+” and revised its outlook to negative on an uncertain policy direction amid rising external risks.
Erdogan has repeatedly advocated for the rate cuts as he promotes a new economic plan prioritising economic growth, credit, production and exports, despite widespread criticism of the policy from economists and opposition politicians.
“There is an element of concern about what the economic plan is, and how closely aligned it would be to engaging with the private sector. There is a lack of clarity around that,” said Khush Choksy, the U.S. Chamber’s senior vice president for international development and for the Middle East and Turkey.
“U.S. companies do have questions about how Turkey will handle the current short-term crisis and get on to the path of long-term growth that it enjoyed for a long period,” he said in an interview.
(Reuters)
