Turkish lira hits record low after central bank cuts rates again

Currency fell as much as 6 per cent to 11.3118 against the dollar, the biggest decline in eight months

The Turkish lira tumbled to a record low after the central bank cut borrowing costs for a third straight month, a move that risks further undermining price stability while eroding what little confidence investors had in the nation’s policymakers.

The lira fell as much as 6 per cent to 11.3118 against the dollar, the biggest decline in eight months. Officials cut the one-week repo rate by 100 basis points to 15 per cent, in line with the median estimate in a Bloomberg survey, and said they would consider ending the easing cycle next month.

It comes as consumer inflation accelerated to almost 20 per cent in October, a level last seen following a currency crisis three years ago.

Under pressure from President Recep Tayyip Erdogan, the central bank has lowered interest rates by 400 basis points since September, driving the currency’s real yield well below zero.

The move contrasts with a tightening drive across some of Turkey’s major peers in emerging markets. South Africa raised its benchmark interest rate for the first time in three years on Thursday, while Mexico increased policy rates last week.

“The decision to cut rates is politically motivated even with their December forward guidance,” said Saed Abukarsh, chief portfolio manager at Ark Capital Management Dubai. “Confidence in any form of central bank credibility has left the door.”

Easier policy in Turkey leaves the lira vulnerable to further gains in the US dollar as speculation grows that the Federal Reserve may tighten policy sooner than anticipated.

The greenback rose to the strongest level in more than a year against a basket of peers this week, piling pressure on riskier emerging-market currencies that have benefited from exceptionally loose policy in the developed world.

The lira has lost about a third of its value against the dollar since December and is poised for a ninth straight yearly loss. It has weakened more than 20 per cent since the central bank started cutting rates in September, the biggest decline in emerging markets.

“This move of the lira is insane yet totally predictable,” said Win Thin, global head of currency strategy at New York-based Brown Brothers Harriman. “When you’re doing worse than the Argentine peso, that’s quite a statement.”

Before the decision, the chairman of Tusiad, Turkey’s biggest business group, said the central bank shouldn’t forget its main target of controlling inflation.

This reflects mounting concerns that extended currency weakness risks destabilising the economy, which sits on $446 billion of gross external debt, central bank data show.

Turkish companies and the government have to repay $13bn in foreign-currency debt in the final two months of the year. More than half — $8bn — is set to mature in November, the biggest amount due over the next 10 months, the latest available data show.

Turkey’s benchmark BIST 100 Index jumped after the decision to trade as much as 3 per cent higher. The yield on 10-year government bonds rose as much as 57 basis points, the biggest increase since September.

Updated: November 18th 2021, 5:13 PM