Turkey lira slides 5 per cent, CB says it will monitor forex risks

The Turkish lira weakened for the third consecutive day on Wednesday, tumbling 5 per cent and eating further into the huge gains made the previous week, as worries persisted over soaring inflation and unorthodox monetary policy.

The losses gathered pace after little initial reaction to the central bank’s (CBRT) 2022 policy document, in which it said it will monitor risks related to the foreign exchange market and do what is necessary to ensure it runs smoothly.

The lira plunged as far as 12.45 against the dollar and traded at 12.3 by 1034 GMT. Despite surging more than 50 per cent last week following state-backed market interventions, it has lost 40 per cent of its value this year.

“The CBRT has no commitment to any exchange rate level and will not conduct FX buying or selling transactions to determine the level or direction of the exchange rates,” the bank said.

It said it would monitor closely the impact of its policy decisions in the first quarter and “the policy framework will be reassessed in order to create a foundation for sustainable price stability.”

The lira surged last week after billions of dollars worth of state-backed market interventions and a government move to cover FX losses on certain deposits, restoring the currency back to its mid-November levels.

The recovery came after President Tayyip Erdogan unveiled an incentive for savers to convert forex deposits into lira, under which their losses incurred due to any erosion in lira value during the deposit period would be reimbursed. Hasnain Malik at Tellimer said this provided a free currency hedge to domestic savers if the lira depreciates.

“But this also implies higher quasi-fiscal costs should the credibility of this hedge or the currency weaken,” he said. The lira hit an all-time low of 18.4 to the dollar before Erdogan’s announcement, after weakening for months due to fears of surging inflation following a series of interest rate cuts sought by the president.

Annual inflation is forecast to have hit 30.6 per cent in December, a Reuters poll found, breaching the 30 per cent level for the first time since May 2003 - six months after Erdogan’s AK Party first came to power.

According to traders’ calculations, the central bank’s net forex reserves, excluding swaps, fell some $8 billion last week, with most of the fall in the first two days of the week. They were down $17-$18 billion as of last Friday since the start of the month, when the bank began its direct interventions.

The central bank has cut its policy rates by 500 basis points to 14 per cent since September. The main share index in Istanbul rose 1.4 per cent.

Turkey’s President Tayyip Erdogan has effectively opened the door to early elections, political analysts said, after two big recent announcements - a 50 per cent rise in the minimum wage and a deposit-protection scheme that arrested a currency crash.

The announcements came within five days of each other as a grinding currency crisis hit a peak on Dec. 20 when the lira tanked to a record low of 18.4 to the dollar, deeply rattling the economy and households.

Erdogan and senior officials from his ruling AK Party (AKP) have repeatedly dismissed the idea of presidential and parliamentary elections being held before schedule in mid-2023.

But the 2022 wage relief and the sharp turnaround in the lira - rallying to 12 per dollar - suggest Erdogan may want to act soon, after a long slide in his opinion poll ratings.

Analysts said his announcements echo past pre-election gambits to prove his leadership credentials. A snap poll could wrongfoot the opposition coalition, which has not yet agreed on a presidential candidate.

“The decisions have... given the impression that the AK Party and Erdogan are excellent managers of the economy,” said Mehmet Ali Kulat, chairman of MAK Consulting.

“For Erdogan, a ‘last minute’ success story emerges before every election,” he said. “We see that this process will be presented as a political leader who beat the dollar and disrupted the game of foreign powers.”

However, the message’s effectiveness will depend on the direction of the lira and inflation, and their impact on Turks who have seen their spending power slashed.

To boost the lira, Erdogan announced a scheme in which the state protects converted lira deposits against future depreciation losses versus hard currencies.