Turkish lira plummets to new low, central bank intervenes

The Turkish lira crashed as much as 7 per cent 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 central bank announced its fourth market intervention in two weeks, buying dollars, as the slide to 14.99 left the lira worth just half of its end-2020 value.

Last week, the bank moved to keep the lira (TRY) below 14 as depreciation fuels inflation in a big emerging market economy which depends heavily on imports.

“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.” By 1044 GMT, the lira had trimmed losses in thin market trading and stood at 14.25 - still 2.5 per cent weaker on the day.

Turkey’s central bank, under pressure from Erdogan, is expected to cut its policy rate by 100 basis points to 14 per cent this week, a Reuters poll showed on Friday, despite inflation soaring to 21.3 per cent 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 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.

Erdogan was expected to hold talks with Central Bank Governor Sahap Kavcioglu, Finance Minister Nureddin Nebati and the heads of state banks in Istanbul on Monday, sources told Reuters.

Turkey’s sovereign dollar bonds dropped, with the 2034 issue down 0.8 cents, according to Tradeweb data. Lira implied volatility gauges jumped, data from Fenics showed.

The lira crash has sharply eroded Turks’ earnings, fuelling poverty and leading to lines of people waiting to buy cheap bread as the price of goods surges. Lawmakers have brawled amid rising tensions in parliament as the opposition slams the government’s handling of the economy.

The central bank has slashed its policy rate by 400 basis points since September, driving the concerns of investors and savers and upending the budgets and future spending plans of locals.

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.

Turkey’s 5-year credit default swaps (CDS) nudged 1 basis point higher to a one-week high of 503 basis points, according to IHS Markit data.

An S&P model largely based on CDS levels, known as the Market Derived Signal Score, shows CDS markets currently expect a two notch downgrade to Turkey’s rating.

Erdogan has repeatedly advocated for 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 US Chamber’s senior vice president for international development and for the Middle East and Turkey.

“US 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.

Turkish President Tayyip Erdogan is expected to hold talks with the central bank governor, finance minister and heads of state banks, sources told Reuters, as the lira plummeted to new lows ahead of another expected interest rate cut this week.

The lira crashed as much as 7 per cent to a record low near 15 to the dollar, hit by worries over Erdogan’s new economic policy and prospects of another rate cut on Thursday, after the bank slashed rates by 400 basis points since September.

Meanwhile the S&P Global Ratings changed its outlook for Turkey’s credit rating to negative from stable, as the country struggles with high inflation and a depreciating currency.

Turkey’s annual inflation has surged above 20 per cent to its highest level in three years after President Recep Tayyip Erdogan installed loyalists at the central bank who share his unorthodox vision that high borrowing costs cause inflation rather than slow it down.

The move was part of Erdogan’s strategy to revive his sagging approval numbers ahead of an election due by 2023. In justifying its outlook downgrade, S&P pointed to both price increases and the lira currency’s loss in value as risks.

“The negative outlook reflects what we view to be rising risks to Turkey’s externally leveraged economy over the next 12 months from extreme currency volatility and rising inflation, amid mixed policy signals,” the ratings agency said. S&P made no change in its ratings of Turkey’s debt.

But it warned that could change if the government’s policies “further undermined the exchange rate of the lira and worsened the inflation outlook, heightening the risk of banking system distress.” The Turkish lira plunged to record lows on Tuesday after President Recep Tayyip Erdogan stuck to his support for interest rate cuts, warning his country was in a “war of economic independence”.

The Turkish currency exchanged hands at more than 13 lira to the dollar, a 15 per cent fall, before recovering slightly from the historic drop. Turkey is facing the worst currency crisis since August 2018 when the value of the lira hit historic lows during a row with then US president Donald Trump.