Turkey’s central bank has intervened to support the lira for the first time in seven years after weeks of sharp falls that dragged the currency to a record low against the dollar.
Policymakers intervened in foreign exchange markets following what they called “unhealthy price formations”, pushing the lira up as much as 8.5pc.
The currency has been into freefall in recent weeks, after President Recep Tayyip Erdogan started pushing for interest rate cuts despite surging inflation in the country.
In a speech ahead of the central bank’s announcement, he said rate cuts would continue in the run-up to the elections in 2023, causing the currency to drop further.
“Our country has now come to the point of breaking this vicious cycle, and there is no turning back from here,” he said.
“The high interest rate policy imposed on us is not a new phenomenon. It is a model that destroys domestic production and makes structural inflation permanent by increasing production costs. We are ending this spiral.”
Mr Erdogan’s approach to monetary policy runs against the conventional economic logic that raising interest rates helps to curb inflation. Last week, the Bank of England Governor, Andrew Bailey, said the Turkish leader was taking an “unusual” stance.
Turkey recorded strong growth during the third quarter, with GDP expanding by 2.7pc amid a post-lockdown rebound.
Maya Senussi from Oxford Economics said the turmoil for the lira puts that strong growth “firmly in the rear-view mirror”, with rising prices taking a roll on consumer spending.
Analysts from Rabobank said: “Not fighting inflation does appear to have boosted the country’s competitive position, but the ultimate cost of its policy choices could be significant.”
Sahap Kavcioglu, governor of the Central Bank of Turkey, is the fourth since Mr Erdogan was sworn in with expanded powers in 2018.
Mr Kavcioglu has made repeated adjustments to forward guidance over recent months that have paved the way for interest rate cuts.
The plunging value of the lira, which has lost nearly a third of its value since Turkey’s central bank began cutting rates in September, has increased costs for regular Turks, some of whom are now using dollars instead.
“CANUTE-LIKE EFFORTS” TO DEFY ECONOMIC LOGIC HAVE LED TO A CURRENCY COLLAPSE
Turkey is heading for “a vicious cycle of inflation and depreciation”, Timothy Ash of BlueBay Asset Management tells Tommy Stubbington in the Financial Times. With inflation running at 19.89% and the Turkish lira plummeting, there is talk of a new currency crisis.
The lira has lost 40% of its value so far this year. As of Tuesday it had recorded 11 successive record lows against the dollar in as many days, say Daren Butler and Nevzat Devranoglu on Reuters.
BACK TO 2018
The latest sell-off came after the central bank cut interest rates to 15%, the third cut since September. Interest-rate cuts reduce the attractiveness of lira-denominated assets, causing investors to sell them in favour of other currencies. At the new interest rate, savings in a Turkish bank account would earn a real return of -4.89%.
President Recep Tayyip Erdogan continues to believe that high interest rates cause inflation, despite ample evidence – not only in his own country – that the opposite is true. He has fired central bankers who didn’t toe the line on easy money.
“THE MSCI EMERGING MARKETS INDEX HAS FLATLINED THIS YEAR DESPITE GLOBAL REFLATION”
Things are starting to look a lot like 2018 again, when the lira “dropped precipitously amid a crisis in relations with the US”, say Jared Malsin and Patricia Kowsmann in The Wall Street Journal.
A plunging currency is “driving up the cost of [imported] food, medicine and other essentials for average Turks”. Some commentators fear a bank run. Yet despite growing signs of discontent, Erdogan appears determined to stay the course; indeed “he has intensified his calls for low interest rates”.
Things got so bad in 2018 that policymakers were eventually forced to reverse course with emergency interest-rate hikes, says Craig Mellow in Barron’s. That sent local stocks up by “a third in four months”. Yet few are betting on a repeat this time.
Since 2018, “Erdogan has replaced professionals at the central bank with yes men”. Global inflationary pressures are amplifying domestic problems, while Covid-19 continues to weigh on the important tourist sector.
EMERGING MARKETS DISAPPOINT
Trouble in one emerging market can quickly spread to others, says Shilan Shah of Capital Economics. Investors in the asset class may panic and sell indiscriminately. Yet any such “financial contagion” is likely to be “much more limited” this time than in 2018.
Turkey aside, most big emerging countries appear to have the foreign-exchange reserves they need to ride out any turmoil. What’s more, non-residents’ holdings of Turkish stocks and government bonds are down by two-thirds since 2018. Foreign investors won’t be panicking and pulling funds from Turkey – most of them have already left.
