The Turkish lira fell to an all-time low on Friday as investors reacted with confusion to the previous day’s rate cut, which some analysts say has hit the mark. pushed the country into a currency crisis.
The lira recovered in morning trade after a sharp drop, but maintained fresh selling in the afternoon in London. The coin was recently trading down around 2% at 11.32 TL per dollar.
The currency has fallen more than 30 percent this year after investors lost confidence in the government’s ability to manage the economy in the face of inflation that surged nearly 20 percent in October. Turkey under governor Sahap Kavcioglu has cut interest rates from 19% since the beginning of September – under heavy pressure from President Recep Tayyip Erdogan – despite rising flee prices.
“If a coin loses more than a third of its value in the foreign exchange market in less than three months, it is probably justifiable to talk about a crisis,” said Ulrich Leuchtmann, head of FX research at Commerzbank. .
Investors say there is little prospect of a long-term recovery in the lira unless the central bank can somehow free itself from Erdogan’s unorthodox belief that high interest rates drive , instead of taming, inflation.
Viktor Szabo, a portfolio manager at Aberdeen Standard Investments, said: “As an investor, when you see a currency depreciating, you always tend to buy in the opposite direction. “But in this case it’s not worth it. If you have some policies that are sure to change then maybe, but there’s no indication that it will. “
While the ostensibly 15% interest rate may be attractive to foreign investors eager to return, the potential annual returns could be “wiped out in a matter of weeks”, given the lira’s rate of decline. , Szabo said.
Erdogan, who fired Kavcioglu’s highly respected predecessor in March, has stepped up a campaign to reduce borrowing costs in recent months to spur growth as he faces a slump in his reputation. language. But Thursday’s cuts, which could be followed by another drop in December, are likely to prove “unsustainable,” according to analysts at Goldman Sachs.
“Policy easing is likely to quickly turn into inflation, rather than growth,” they say, adding that negative real interest rates – once inflation are taken into account – increase the risk that households Turkish families will begin to convert their savings into dollars in bulk.
“Eventually they will have to raise,” said Timothy Ash of BlueBay Asset Management. “Otherwise, you will get in a situation where inflation is too high, you will see locals selling lira, you will get into a vicious cycle of inflation and devaluation.”