ANKARA: Turkey’s lira fell as much as 3.7% to a new intraday record low of 10.45 to the dollar on Tuesday, prompting some analysts to warn of another currency crisis due to a central bank seen as bowing to political pressure and slashing interest rates.
The lira has fallen 28% this year, the weakest performer in emerging markets (EM), mainly on investor concerns about President Tayyip Erdogan’s influence on monetary policy and what many call a premature and risky monetary easing cycle.
The currency ended the day down 2.8% at 10.35 against the dollar, its largest daily percentage fall in a month and a record closing low. The central bank has cut its key rate by 300 basis points since September, when the lira selloff accelerated, and is expected to lower it to 15% from 16% this week, according to a Reuters poll.
Inflation has meanwhile risen to near 20%, four times the official target, eating deeply into the earnings of Turks along with the sharp currency depreciation. Lira weakness, in turn, stokes prices via Turkey’s heavy imports.
“There is a growing risk that the central bank’s continued obedience to pressure from President Erdogan for interest rate cuts results in sharp and disorderly falls in the currency over the coming days and weeks,” said Jason Tuvey, senior EM economist at Capital Economics.
The central bank has defended its independence and said price pressure is temporary. Last month it stressed the need to address current account deficits, prompting opposition politicians to claim the government is sacrificing the currency.Erdogan frequently calls for lower rates to boost the economy, including exports and jobs. He has rapidly overhauled the bank’s leadership, including firing another three monetary policy committee (MPC) members last month.
“The central bank’s hands are tied. It is carrying out the Palace’s orders,” said Kemal Kilicdaroglu, leader of the main opposition CHP Republican People’s Party. “This is their target: for the lira to erode...” he added.
The lira is down some 33% from mid-February, when it touched 6.9 to the dollar on expectations of tight policy under former central bank chief Naci Agbal. Erdogan, a self-described enemy of interest rates, replaced him with Sahap Kavcioglu in March.
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