https://ahvalnews.com-Turkey’s lira slid by more than 3 percent against the dollar on Thursday, the biggest decline since a currency crisis deepened in December, and stocks slumped after Russian troops invaded Ukraine.
The lira fell to as low as 14.24 per dollar in volatile trading, the weakest in two months. It was trading down 2.9 percent at 14.22 against the U.S. currency at 10:55 a.m. local time. The main Istanbul BIST-100 share index dived 6.2 percent to 1,891.87 points.
The conflict across the Black Sea to Turkey’s north is renewing concern for economic and financial stability in the NATO member. The lira slumped 44 percent against the dollar last year and inflation surged to a two-decade high 48.7 percent after global commodity prices jumped and President Recep Tayyip Erdoğan ordered the central bank to cut interest rates.
Erdoğan’s government is relying on lira stability to implement an economic programme to boost economic growth, employment, and exports ahead of elections scheduled for next year.
The central bank had pegged the lira at around 13.5 per dollar in 2022 by selling foreign exchange. It stepped up its defence of the lira this week, selling between $1 billion and $1.5 billion on Tuesday, after Putin ordered troops into eastern Ukraine. In December, it sold nearly $20 billion, and Erdoğan announced a plan to link lira deposits to the dollar to help reverse surging demand for foreign currency.
“They cannot continue the FX intervention long, given limited FX reserve buffers, so if the Russo-Ukraine crisis last long the central bank will either have to raise policy rates or let the lira go again,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.
The central bank’s reserves, net of liabilities, lie deeply in negative territory. The bank’s ability to defend the lira is also constrained by Erdoğan’s aversion to high interest rates. He has sacked three governors since 2019 by presidential decree and ordered the bank to cut rates to 14 percent from 19 percent late last year claiming higher borrowing costs were inflationary.
On Thursday, analysts at ratings agency Standard & Poor’s said that the crisis in Ukraine threatened to send inflation in Turkey higher as global commodity prices spiked. Turkey imports nearly all the oil and natural gas it consumes. The average expectation is that the central bank will keep interest rates steady this year, but there is a high degree of uncertainty regarding this, Tatiana Lysenko, chief economist for emerging markets at S&P, told the Dünya newspaper.
Earlier in February, Fitch Ratings cut Turkey’s sovereign debt further into junk territory warning of the risk of further financial instability ahead of elections next year.