Turkish Lira plunges to new record-low as investor concerns rise

ISTANBUL - Reuters

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Turkey’s Lira plumbed a new record low against the U.S. dollar on Aug. 19 after the Central Bank failed to assuage investor concerns about its ability to defy political pressure and lift rates. The Bank signaled it will not raise borrowing costs before the rate hike move by the U.S. Federal Reserve (Fed), rising concerns about the vulnerability of Turkish Lira and the unwillingness of authorities to defend it. 

The lira has lost around 19 percent of its value against the dollar so far this year, making it one of the worst performing emerging market currencies. 

Economists have said the Central Bank desperately needs to hike rates to defend the lira, but it has been unwilling to do so, drawing criticism it is in thrall to President Recep Tayyip Erdoğan, who has equated high rates with treason.

The Bank’s decision on Aug. 18 to keep rates on hold “undermines the inflation-flighting credibility of one of the least credible EM banks,” said Nicholas Spiro, of Spiro Sovereign Strategy.

A day after the policy-setting meeting, the Bank further frustrated investors with a presentation that suggested it would take its cue for rate hikes from the U.S. Federal Reserve, according to some economists present.

Decision to be tied ‘Fed’s move’

“Generally speaking, the hikes in the policy rate in the coming months will be tied to Fed rate hikes,” Muammer Kömürcüoğlu, an economist at İş Invest who attended the meeting, told Reuters. “Hence the steps taken by the central bank in the coming period will be determined by the Fed.”

That did little to reassure investors who have been looking for the bank to act decisively and raise rates to put a floor under the lira.

The Bank also said on Aug. 19 inflation expectations had not yet reached “desired levels”, but did not give further details.

İş Invest’s Kömürcüoğlu said he believed the policy rate, currently 7.5 percent, could be raised as far as 9.5 percent in the next six months.

Underscoring the political pressure the Bank faces, one of Erdogan’s chief advisers, Cemil Ertem, shrugged off concerns about the lira’s chronic weakness, saying the currency had been helped by China’s devaluation of the yuan.

“There will be no crisis in Turkey no matter how high a level the dollar reaches,” he wrote in the pro-government Daily Sabah newspaper on Aug. 19.

The lira, was at 2.9110 to the dollar at 10.44 GMT, after earlier touching 2.9125, a new record.

It has hit a series of all-time lows since last week, when the ruling AK Party failed to find a junior partner to form a coalition government, exacerbating the political uncertainty.