Turkey’s lira dived to a fresh record low against the dollar on Monday after Standard & Poor’s cut the outlook on the country’s sovereign debt to “negative” from “stable”.
The lira was also trading lower ahead of a central bank meeting on interest rates on Thursday, when policymakers are expected to press on with a series of rate cuts despite surging inflation.
The lira slid to as low as 14.46 per dollar, taking losses this year to almost 50 percent. The currency was trading down 3.4 percent at 14.34 per dollar at 10:51 a.m. in Istanbul.
S&P cited “rising risks to Turkey’s externally leveraged economy over the next 12 months from extreme currency volatility and rising inflation” in a statement late on Friday.
The ratings agency said it could cut Turkey’s debt rating from ‘B+’, four notches below investment grade, if government policy “further undermined the exchange rate of the lira and worsened the inflation outlook, heightening the risk of banking system distress.”
Turkish President Recep Tayyip Erdoğan has ordered the central bank to lower interest rates for three successive months even as inflation accelerated beyond 20 percent. The bank’s benchmark interest rate now stands at 15 percent compared with 19 percent in September.
Turkey’s consumer price inflation rate rose to 21.3 percent in November from 19.9 percent the previous month. Some analysts are predicting that inflation could accelerate to as high as 30 percent in the coming months.
Ratings agency Fitch also lowered the outlook on Turkey’s debt to “negative” from “stable” on Dec. 3 citing financial risks created by monetary policy easing.
Deutsche Bank warned that the Turkish authorities may be forced to reverse course and raise interest rates by 10 percentage points in the first quarter of the year to arrest the lira’s declines and tame surging inflation, BloombergHT television reported on Monday.