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Turkey Lira ‘In Freefall’, Eyes on Central Bank

Turkey Lira ‘In Freefall’, Eyes on Central Bank

Turkey’s embattled lira on Wednesday lost over 3.5 percent in value to hit new historic lows against the US dollar, as markets watched to see if the central bank will take emergency action to buttress the currency.

Following sharp losses on Tuesday, the lira continued to underperform all other emerging market currencies, after suffering a hammering in Asian trade overnight when Japanese investors sold Turkish assets.

It lost 3.6 percent against the dollar to trade at 4.84, only slightly paring losses after earlier for the first time ever testing the 5.0 ceiling by hitting 4.92 lira to the dollar.

Over the last month alone, the lira has lost over 18 percent in value against the dollar as fears grow over the health of the Turkish economy which is dogged by double-digit inflation despite high growth.

Its performance has been even worse than the Argentinian peso which has also suffered severe turbulence over the last month.

The sharp fall in the currency’s value has come at a hugely sensitive time as Turkey heads to June 24 presidential and parliamentary elections where President Recep Tayyip Erdogan is seeking a new mandate and a thumping parliamentary majority.

‘Complete freefall’

The next meeting of Turkey’s central bank is not due until June 7 but economists believe an emergency — and substantial — rate hike by the central bank is not only on the cards, but essential.

“It seems highly likely that they’ll take action,” said William Jackson, emerging markets economist at Capital Economics in London, saying the bank needed to raise rates by 200-300 basis points to provide some support to the lira.

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He told AFP the sell-off in the lira over the past few weeks has been even more severe than that which preceded the emergency hike by the bank in early 2014.

With the bank and its chairman Murat Cetinkaya silent for the past week, he said the central bank needs also to act to “shore up its own credibility” with markets questioning whether it will “be able to take action”.

The situation has not been helped by Erdogan himself who has consistently pressured the central bank to keep rates down to boost growth.

He hurt the lira last week by saying he plans a greater say in monetary policy if he wins the elections, which markets saw as a slap in the face of the nominally independent central bank.

He has also made statements that fly in the face of economic orthodoxy, describing interest rates as the “mother and father of all evil” and saying low interest rates help keep down inflation.

“The currency is in complete freefall,” said Jameel Ahmad, analyst at FXTM forex brokers, saying Erdogan’s comments had been the “catalyst” for the lira’s current woes.

Ahmad said in a note that the threat to the central bank’s independence “is so high that it is preventing traders from wanting to even take a risk on buying the lira at its current depressed levels.”

‘Disorderly adjustment risk’

The Istanbul bourse said it was taking measures to convert its foreign exchange assets to lira to “fight speculative actions aimed at creating a negative image of Turkey”, but it was unclear if this would have any impact on the currency.

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An AFP photographer in Istanbul’s Grand Bazaar said currency traders were refusing to sell dollars to limit their own losses amid the currency slide.

The economy has generally been a trump card for Erdogan in his 15 years in power, with the Turkish strongman crediting himself with ending chaos that brought the country to near financial meltdown in the 2000-2001 crisis.

But Jackson said if the central bank failed to tighten monetary policy “the risk of a disorderly adjustment and a sharp economic downturn — possible a recession — will mount.”

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