Turkey’s lira extended a record low in Friday trading on bets that the central bank was not willing to raise interest rates to stem the currency’s decline.
The lira dropped as much as 1.2 percent to 7.3209 per dollar in Istanbul, taking losses this week to 4.8 percent. The currency has fallen 19 percent this year.
The central bank, which has spent tens of billions of dollars of its foreign currency reserves defending the lira in recent months, said on Friday it would halve lira liquidity limits offered to major banks in open market operations. On Thursday, it said it would phase out additional liquidity measures and use all available instruments to reduce excessive volatility in the markets.
Backed by President Recep Tayyip Erdoğan, the central bank has slashed interest rates from 24 percent to below the rate of inflation to spur economic growth and a lending boom. That has increased selling pressure on the lira as investors pulled money out of Turkey and Turks withdrew lira deposits because their returns were being eroded.
Investors are calling on the central bank to increase the benchmark interest rate from 8.25 percent to help steady the lira and rein in an overheating economy, which threatens to destabilise financial markets. Similar economic stimulus measures by the authorities in 2018 helped provoke a currency crisis that led to a painful recession. Inflation in Turkey stands at 11.8 percent.
But Erdoğan, who sacked and replaced the central bank’s governor in July last year for failing to cut borrowing costs, says higher interest rates are inflationary, a view that jars with conventional economic wisdom. That potentially ties the hands of monetary policymakers as they work to curb the lira’s losses.
“New policy setting is EBRH – Everything BUT Rate Hikes,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.
Erdoğan has tightened his grip over economic decision-making since the introduction of a full presidential system of government two years ago. He has appointed his son-in-law Berat Albayrak as minister in charge of the Treasury and Finance Ministry.
In a further effort to support financial stability, the country’s banking watchdog will revise a rule that compels banks to boost credit, marking a possible end to the government’s push to spur loan growth, Bloomberg reported on Friday, citing people with knowledge of the matter.