Turkey’s lira slid for the seventh-straight day on Wednesday, reaching a record low of almost 10.5 per dollar, raising concern among investors that Turkey may be facing a repeat of a 2018 currency crisis.
The lira fell to as low as 10.457 per dollar, taking losses since the start of September to more than 20 percent. It was 0.3 percent weaker at 10.36 per dollar at 9:58 a.m. local time in volatile trading. The lira is the worst-performing major emerging market currency this year.
“Concerns about another currency crisis continue to grow louder,” Jason Tuvey, senior emerging markets economist at Capital Economics in London, said in an e-mailed report. “There is growing risk that the central bank’s continued obedience to pressure from President Erdoğan to interest rate cuts results in sharp and disorderly falls in the currency over the coming days and weeks.”
Turkey’s central bank has slashed interest rates to 16 percent from 19 percent over the past two months, bucking a trend of rate hikes in emerging markets, even as inflation accelerated to almost 20 percent. President Recep Tayyip Erdoğan, who has sacked three central bank governors since the summer of 2019, insists that higher interest rates are inflationary, a view that jars with conventional economic theory.
The central bank next meets on interest rates on Friday. Finance industry professionals are expecting another cut of 1 percentage point, according to a central bank survey of economic indicators published last week.
Erdoğan may be seeking rate cuts at all costs, believing that economic growth and jobs rather than fighting inflation will win him elections scheduled for 2023, said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.
“The line seems to be that a cheaper currency will eventually create a floor, there the lira is just so cheap, the momentum has to turn,” Ash said. “Just wonder what is the floor for the lira though? 11? 12? 15?”
The lira lost almost a third of its value in 2018, when the government railroaded economic growth through cheap loans and Erdoğan became embroiled in a political crisis with the United States over the detention of a U.S. pastor on terrorism charges. The currency also slumped last year on government stimulus, forcing the central bank to reverse dovish policies and hike interest rates from September.
Tuvey said that monetary policymakers have indicated that they have a greater tolerance for currency depreciation than previously, meaning that the lira would likely need to clear a high bar in terms of currency weakness before the central bank considers halting the easing cycle or even hiking interest rates. Therefore, a first line of defence may be import compression policies or capital controls in a repeat of unsuccessful actions undertaken in 2018, he said.
“Failure to act in a timely and orthodox manner to address investors’ concerns, however, runs the risk of creating a self-fulfilling cycle whereby the central bank’s unwillingness to tighten policy prompts a further sell-off of Turkish assets (including the lira), raising inflation expectations and further increasing demands for higher interest rates,” Tuvey said.
“The result is that the lira weakens at an ever-increasing pace. The experience from 2018 is that the currency could experience intra-day falls of more than 10 percent which, based on the current exchange rate, could see the lira fall well beyond 11/$.”
Ahval