Turkey's lira tumbled to a fresh record low against the dollar on Friday, prompting the central bank to step in with an attempt to shore up the currency following the collapse of talks to form a coalition government. However, the moves - which traders said were largely symbolic - appeared to have little immediate impact as the renewed political uncertainty has further dented confidence in what is already one of the worst performing major emerging market currencies this year.
The central bank lowered the one-week dollar deposit rate to 2.75 percent from 3 percent and raised the remuneration rate paid on foreign exchange required reserves to 0.23 percent from 0.21, policy tweaks designed to support the lira. It also tightened liquidity, opening a 19 billion lira one-week repo auction, compared with a 20 billion lira redemption.
"These are symbolic steps and have a limited impact. They reduced the underperformance in the lira somewhat," a forex trader at one bank said. "These steps cannot prevent the exchange rate breaking new records." The lira hit a record low of 2.8460, bringing losses against the US currency this year to more than 17 percent. By 0736 GMT, it had rebounded to 2.8311 after the central bank's steps.
Prime Minister Ahmet Davutoglu said on Thursday an election now appeared to be the only option after last-ditch negotiations between his AK Party and the main opposition CHP broke down. He said he preferred an election to be held as soon as possible. The prospect of fresh elections has further clouded the outlook for a country battling Islamic State insurgents in Syria and Kurdish militants at home.
"Turkey faces daunting economic and political challenges and with the decision to go for early elections, Turkey will be losing precious time and expose itself to several risks," said TEB chief economist Selim Cakir. Cakir said recent opinion polls implied the distribution of parliamentary seats would not change significantly after an early election.
Surveys have indicated the AK Party may have increased its support by about two percentage points while the pro-Kurdish Peoples' Democratic Party (HDP) was also crucially seen above the 10 percent threshold to enter parliament. The lira weakness has heightened anticipation of next Tuesday's central bank policy meeting. The bank said recently it would gradually normalise its monetary policy framework.
In a Reuters poll, most economists expected key interest rates to be kept on hold, while four participants predicted a 50-100 basis point hike in the repo rate. The BIST 100 index, the broadest measure of Istanbul stock performance, edged 0.25 percent higher after shedding 1.4 percent on Thursday. The benchmark 10-year government bond yield stood at 9.86 percent, up from a spot close of 9.74 percent on Thursday.
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