Turkey’s lira hit a fresh all-time low against the dollar on Thursday on concern among investors that the central bank’s dovish monetary policy is out of step with a surge in global inflation.
The lira dropped to as low as 9.965 per dollar, extending losses this year to more than 25 percent. The currency was trading down 1.2 percent at 9.951 per dollar at 11:31 a.m. local time in Istanbul.
Turkey’s central bank began cutting interest rates in September despite an uptick in inflation and global price pressures, which weaken the allure of riskier emerging market assets. The bank has cut interest rates to 16 percent from 19 percent in the past two months even as inflation locally accelerated to 19.9 percent.
The central bank’s monetary policy puts Turkey out of step with nearly all of its major emerging market peers, which are hiking interest rates to deal with inflation. On Wednesday, the U.S. Labor Department said inflation accelerated to 6.2 percent in October, the highest level in more than three decades.
Turkey’s central bank is under strong political pressure to ease monetary policy. In March, President Recep Tayyip Erdoğan, who asserts that higher interest rates are inflationary, replaced the governor of the central bank after he raised borrowing costs to 19 percent from 10.25 percent during his four-month tenure to tame inflation. Inflation had stood at 15.6 percent at the time of his sacking. The lira traded at 7.21 per dollar.
On Oct. 14, Erdoğan sacked three of the seven members of the central bank’s rate-setting committee. Şahap Kavcıoğlu, Erdogan’s hand-picked governor, chairs the committee.
Last month, Commerzbank predicted that the lira would decline to 11 per dollar by the end of March because of the central bank’s “dangerous monetary policy experiment”.
Investors are concerned that below-inflation interest rates in Turkey will cause economic overheating, encourage more local savers to switch to dollars and euros, and force the central bank to use its limited foreign currency reserves to prop up the lira. The reserves, net of liabilities, are deeply in negative territory.
Annual inflation in Turkey has exceeded 10 percent almost every month for the past five years. That is more than double the central bank’s official target of 5 percent.
The central bank’s backing of economic stimulus in Turkey contributed to a currency crisis in 2018 that led to a painful recession. The bank also kept interest rates at below inflation for much of last year, prompting investors and local savers to sell the lira. The currency fell to successive record lows until monetary policymakers were forced to intervene and raise borrowing costs in September.
The lira had traded as strong as 1.15 per dollar just prior to the global financial crisis of 2008.