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Turkish lira drops to fresh lows ahead of key central bank meeting

The Turkish lira suffered another round of severe volatility as traders braced for a central bank decision that will test policymakers’ willingness to act against high inflation and the risk of currency crisis.

The lira fell as much as 3.4% in the early Asian trading day on Thursday, to a historic low of 10.9785 TL against the US dollar. The coin has stabilized at 10.7 TL when trading started in London, but it is still down 10% in just the past three weeks.

Cristian Maggio, head of portfolio strategy at TD Securities in London, said the Turkish central bank faces a “time of reckoning” when it announces its latest policy decision at 11 a.m.

Markets are expecting the central bank to cut key interest rates by 1 percentage point to 15%, extending the cycle of cuts that have driven rates down from 19% in March, according to a survey of economists. by Bloomberg.

The central bank has come under intense pressure from Turkish President Recep Tayyip Erdogan to ease monetary policy even as inflation has risen to nearly 20%. A weaker currency tends to exacerbate inflation because it increases the prices of imported goods, creating a vicious cycle.

Erdogan, who holds the unorthodox view that high interest rates cause, rather than tame, inflation, on Wednesday re-committed to freeing Turkey from the “scourge” of high interest rates.

“I apologize to our friends [from the ruling party] who protects? [high] but I cannot and will not go down the same path with them,” he said.

Lira line chart per US dollar showing a falling Turkish lira

Turkey’s monetary easing makes the country optimistic at a time when many other emerging markets such as Russia prices are increasing. The US Federal Reserve, the world’s most influential central bank, is also easing stimulus measures, which has put emerging markets under additional pressure to raise interest rates.

The lira is down 30% against the dollar in 2021, on par with the decline sustained during the tribulation three years ago.

“[It] It’s as if we’re approaching a time of currency crisis in Turkey once again, said Tim Ash, emerging markets strategist at BlueBay Asset Management. “Sure [central bank] can’t cut rates after today, even keeping one level is not enough, they need to raise and be strong. ”

Column chart Annual change in consumer prices (%) shows Violation in Turkey close to 20%

The vibrant market was further spooked by an entry published overnight in the country’s official gazette regarding foreign currency transactions at the Turkish currency exchange office.

Turkish officials dismissed frenzied speculation on social media that the move was a sign of impending capital controls. They said the directive was a slight technical change from the previous requirement for citizens to present identification at foreign exchange offices, arguing that it was indeed a liberalization measure. raise the minimum trade amount for such a claim to $100.

“Foreign currency transactions take place freely between buyers and sellers in the market. NS [new] Ministry of Finance and Finance said.

The change had been discussed for several weeks, an official said, adding that the government had not expected its publication to be considered “a big deal”.

Foreign investment in Turkish markets has declined in recent years, and many international fund managers were hit hard in March when Erdogan fired central bank chief Naci Agbal, a respected former official who started the rate hike cycle.

Turkish currency traders and managers said at the time that the layoffs caused a sharp drop in the currency, and government measures prompted the withdrawal of positions in Turkish assets. Turkey becomes more difficult.

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