Turkish lira slides through 9 per dollar to record low
Turkey’s lira weakened to a record low on Tuesday, extending losses after the central bank unexpectedly cut interest rates late last month.
The lira fell to as low as 9.04 per dollar, taking losses this year to 18 percent. It was trading down 0.3 percent at 9.01 per dollar at 10:38 a.m. local time in Istanbul.
The central bank shocked most investors by reducing the benchmark interest rate to 18 percent from 19 percent on Sept. 23, responding to instructions from President Recep Tayyip Erdoğan to lower borrowing costs. Most emerging markets have adopted a tightening bias in monetary policy to deal with global inflationary pressures.
Erdoğan, who acquired vast new executive powers in 2018, has sacked three central bank governors in just over two years by presidential decree. He appointed current governor Şahap Kavcıoğlu in March to replace former finance minister Naci Ağbal, who had hiked interest rates substantially to tackle double-digit inflation during a four-month tenure.
“Incredible to think that the lira is weaker by one fifth since the inexplicable firing of Ağbal in Q1,” Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in comments on Twitter. “There was a way out then. Now?”
Turkey’s consumer price inflation (CPI) rate climbed to 19.58 percent last month, the highest level in major emerging markets outside of crisis-hit Argentina. Kavcıoğlu says the bank is now focusing on the lower core inflation rate of 16.98 percent, rather than CPI, when setting monetary policy. Core inflation strips out more volatile food and energy prices that have helped drive CPI higher.
Only two of 20 economists had predicted a reduction in interest rates last month, according to a Reuters poll last month. But on Monday, Kavcıoğlu insisted that the rate cut had not come unexpectedly.
“I can say very clearly that we did not carry out a surprise cut,” the governor said after a presentation to the planning and budget commission at the parliament in Ankara. He said inflation was being driven by temporary factors.
Interest rates will decline under any governor appointed by Erdoğan, said Tatha Ghose, senior emerging markets economist at Commerzbank.
“The FX market has every reason to price in lower interest rates in coming quarters, which is exactly what it has been doing, thereby resulting in noticeable underperformance of the lira exchange rate,” Ghose said in e-mailed comments to clients.
The Institute of International Finance, an association representing the global finance industry, says the lira is overvalued, setting a so-called “fair value” of 9.5 per dollar. Lira weakness will help Turkey’s exports and close a current account deficit that widened to more than 5 percent of gross domestic product last year on the back of government stimulus, it says.
Erdoğan has been losing confidence in Kavcıoğlu after he waited since March to cut rates, Reuters reported on Friday citing unidentified sources.
The central bank next meets on interest rates on Oct. 21. Another rate cut may be pending. Kavcıoğlu said last week that he expected a slowdown in core inflation.