Turkish lira at new record low, CB seen sticking to playbook

The Turkish lira plumbed more record lows on Monday, touching 7.6 against the dollar, as expectations grew that the central bank would keep its key interest rate steady this week but continue to tighten credit via other measures.

Analysts including those at Goldman Sachs said the bank would likely use its policy meeting on Thursday to nudge up its late liquidity window (LLW), which at 11.25 per cent is the highest of a handful of interest rates that it controls.

That could help protect the lira — which has tumbled 22 per cent this year and lost half its value since the end of 2017 — from a more dramatic fall.

But analysts said such a move would probably only delay a formal hike to the key policy rate that has remained at 8.25 per cent since May.

The currency was at 7.5900 at 0917 GMT, 0.3 per cent weaker than Friday’s close.

It has dipped in 13 of the last 15 sessions and is among the world’s worst performers in 2020 in part due to aggressive monetary easing over the last year that left real rates deeply negative.

The bank is reluctant to restrict growth just as the economy is recovering from a nearly 10 per cent contraction in the second quarter due to the pandemic. It also expects inflation to dip, although price rises have remained stuck in double-digits.  While most economists polled by Reuters expect no formal hike this week, they predict the central bank will continue to take steps to raise the weighted average cost of funding, which has climbed to 10.4 per cent from 7.3 per cent in two months.

Among the minority, Deutsche Bank said it expects a 200 basis-point rise in the key one-week repo rate on Thursday.

But Kevin Daly at Goldman Sachs said the bank would rather likely raise the LLW to 12 per cent given the combined pressure of depleted reserves, the hit to the tourism sector, and Turkey’s heavy external loan payment schedule through year end.

Ehsan Khoman at MUFG Bank forecast a rise in LLW to 11.75 per cent. “The main risk... is that the authorities tighten policy too little and too late as they prefer to remain supportive of growth, a policy course which would add to the risks around the lira,” he wrote.

Veterans of Turkey’s central bank have some advice for the policymakers, who are on the frontlines of Ankara’s unorthodox battle against a record-low lira and the economic impact of coronavirus: raise interest rates now and get back to basics.

Four former policymakers, including a governor, told Reuters the bank must win back some credibility by moving to wrestle inflation down to target for the first time in nearly a decade.

The first step in heading off a possible crisis, they said, is setting aside back-door policy tools and using a meeting next week to formally raise the benchmark policy rate. That could slow a 20 per cent drop in the lira which has put it among this year’s worst-performing currencies.

Analysts say a rate hike is unlikely, especially given President Tayyip Erdogan’s repeated calls for cheaper credit and the sacking last summer of the previous central bank chief for ignoring instructions. Under new governor Murat Uysal, the bank slashed rates to 8.25 per cent from 24 per cent in less than a year, and has held them there since May.

“The trend is going toward a one-man rule, so talking about central bank independence is absurd right now,” said Bulent Gultekin, governor in 1993 and now a professor at The Wharton School in Philadelphia.

“The central bank cannot alone reform overall Turkish economic policy. But in the meantime they can gain some time by raising rates to ensure, for now, there is no panic.” The bank did not immediately comment. Governor Uysal has previously said the bank has policy independence and that policy is in line with projections that inflation will soon start to slow.

Turkey’s currency touched an all-time low this week beyond 7.5 per US dollar, keeping imports expensive and inflation near 12 per cent despite a sharp economic slowdown due to the coronavirus.

Analysts say the selloff has laid bare the limits of Turkey’s costly interventions in FX markets to stabilise the lira. They calculate the central bank and state banks have sold some $120 billion in dollars since last year.

The interventions have played a role this year in nearly halving gross FX reserves at the central bank, which has also bought record amounts of government bonds to backstop Ankara’s fiscal response to the pandemic.

Hakan Kara, who was the bank’s chief economist until last year, said extraordinary tools such as interventions and tweaks to required reserves have been over-used and are now blunted.

Reuters