Turkey’s lira fell on Monday following a rally last week as investors speculated over the outcome of a key central bank meeting on interest rates on Thursday.
The lira dropped 1.3 percent to 7.75 per dollar in Istanbul. It had surged by more than 10 percent last week from a record low of 8.58 per dollar after President Recep Tayyip Erdoğan sacked the central bank chief on Nov. 7 and replaced him with a respected technocrat, raising expectation for a big hike in interest rates.
The Turkish lira has lost almost a quarter of its value this year and has slid by more than half since the start of 2018, when a currency crisis swept through financial markets. At the core of the lira’s losses has been concern about lax monetary policy, which has been advocated by Erdoğan to help stimulate economic growth via a borrowing boom by businesses and consumers.
The central bank will probably increase its benchmark interest rate to 15 percent from 10.25 percent, according to the median estimate in polls of economists held by Reuters and Bloomberg last week. The bank last hiked the rate by 2 percentage points in September before surprising investors by leaving it unchanged last month.
U.S. investment bank Goldman Sachs is among financial institutions expecting the central bank to raise rates to 15 percent. New York-based JPMorgan said last week that it had increased its Turkish lira exposure to “marketweight” from “underweight”, anticipating that monetary policymakers would increase rates by 5 percentage points.
The central bank may hike borrowing costs much less than many economists expect, Morgan Stanley said in a report to clients, according to Bloomberg.
The bank, under new governor Naci Ağbal, a former finance minister, will probably raise the benchmark interest rate by just 1.5 percentage points to 11.75 percent because “domestic inflation drivers such as local-currency loans growth and domestic demand have normalised, which in itself calls for less aggressive action,” Morgan Stanley economists Alina Slyusarchuk, Andrea Masia and Georgi Deyanov said.
The reversal in demand for loans in Turkey, which followed a borrowing boom earlier this year, was underscored by official housing sales data on Monday.
Purchases of homes via mortgages slid by an annual 49 percent to 25,566 units in October, pushing overall home sales down by 16 percent. More than 130,000 homes were financed with such loans in July, according to official data. Turkey’s construction industry has been a key driver of economic growth over the past decade and has enjoyed strong government backing.
Rather than hike the benchmark interest rate, Turkey’s central bank has preferred to raise average funding costs for banks via a so-called interest rate corridor. Those costs, which banks tend to pass on to clients, have almost doubled from around 7.5 percent in July.
Annual inflation in Turkey edged up to 11.9 percent in October from 11.8 percent the previous month. It has remained almost unchanged since July, when it slowed to 11.8 percent from 12.6 percent the previous month.