ANKARA: The Turkish lira plummeted more than 5% on Thursday as investors sought safe havens after Russian forces invaded Ukraine, sparking concerns of fresh inflationary pressure in Turkey and prompting Ankara to call for confidence in the local currency.
The lira weakened to as much as 14.62 against the dollar, its weakest level since late December, amid a full-blown currency crisis. It later pared some losses, standing at 14.23 by 1332 GMT.
The lira had stabilised over the past two months, thanks to a scheme that protects lira deposits against depreciation and costly interventions from the central bank in the currency market.
It blew through a tight band that it had been stuck in for the past two months as volatility returned from Tuesday this week due to rising tensions between Moscow and Kyiv.
Its decline steepened on Thursday as the dollar strengthened after Russia invaded Ukraine by air, sea and land.
Ipek Ozkardeskaya, senior analyst at Swissquote, said it would be more difficult to keep the lira at a fixed level given the safe-haven flows to the dollar.
"Pressure is increasingly building and the cost of keeping the lira stable is therefore increasing," she said.
"This doesn't mean that things will automatically get out of control, but the risks of seeing a significant drop in the lira has increased," Ozkardeskaya added.
Turkey's Treasury said in a statement that it would take the necessary measures against the economic impact of the conflict, and called on Turks to maintain confidence in the lira.
Turkish central bank's net FX reserves rose to $19.80bn
Inflation
The currency crisis, which saw the lira lose 44% of its value against the dollar, was sparked by a series of unorthodox rate cuts from the central bank, long sought by President Tayyip Erdogan.
The depreciation stoked inflation, which neared 50% in January and is expected to rise further in coming months.
Surging oil, gas and commodities prices are likely to put further upward pressure on inflation in Turkey, said Piotr Matys, senior FX analyst at In Touch Capital Markets.
"Consumer prices, particularly food prices, are likely to remain high for an extended period of time as commodity prices are rising globally. Food producers are going to have to deal with rising oil and gas prices," he said.
Brent oil surged past $100/barrel for the first time since 2014 over the tensions, posing risks for energy importer Turkey, while wheat traded at its highest level this year.
The main BIST 100 stock index in Istanbul was down 8.7% at 1159 GMT, while the banking index fell 8.4%. The sharp decline in the indices triggered a trading halt on Thursday morning.
The yield on the 10-year benchmark bond rose 230 basis points from Wednesday's close to 24.8%, before edging lower to 24.3%.
The rate cuts from the central bank last year were part of Erdogan's new economic plan that prioritises exports, current account surplus, employment and low rates.
Turkey is also likely to see a sharp drop in tourism and export income this year from Russia and Ukraine, two countries that account for a significant portion of its visitors, said Murat Kubilay, an Istanbul-based economist.
"The stability programme based on exchange rate-protected deposits and veiled reserves sales will be strained further," he said.
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