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Monday, August 15, 2022

Turkish lira plunges to fresh low ahead of anticipated interest rate cut

People doing shopping at the local market in Istanbul, Turkey on December 5th, 2021. The depreciation of the Turkish lira weakened the purchasing power of citizens.

Erhan Demirtas | NurPhoto via Getty Images

Turkey’s battered currency fell to a new low Monday past 14 to the dollar, ahead of what investors expect to be rate cuts from the central bank despite soaring inflation.

The lira was trading at 14.33 to the dollar at 1:25 p.m. in Istanbul, according to Reuters data, a slight recovery from the record low of 14.99 earlier in the day and the first time the currency has surpassed 14 to the greenback. By evening local time it had recovered somewhat, trading at 13.81 to the dollar around 7 p.m.

Turkey’s central bank subsequently announced it would intervene directly in the foreign exchange market on Monday, selling dollars to prop up the lira.

Turkish Finance Minister Nureddin Nebati said Monday the country is determined not to raise interest rates — in an echo of President Recep Tayyip Erdogan’s hardline stance against raising rates — which economists agree would actually aid the currency and rein in inflation, which is now around 20% in the country of 84 million.

“We won’t raise the interest rate; you will see that we can do this without raising rates,” Nebati said, adding that he did not know if the central bank’s monetary easing would stop. The central bank has cut interest rates by 400 basis points since September, against the pleas of many investors, economists and former Turkish finance officials. Erdogan has long railed against interest rates as the enemy of growth and the cause of inflation, rather than being a tool that cools inflation.

The central bank’s intervention by selling dollars is mostly aimed at limiting depreciation pressure on the lira, “a temporary measure to slow things down,” according to Erik Meyersson, senior economist at Handelsbanken Macro Research in Stockholm. But with already low foreign exchange reserves, it’s not likely to be a sustainable solution.

“Turkey’s FX reserves aren’t large enough to either reverse or even stabilize the lira’s losses in the medium- or longer term,” Meyersson told CNBC. “The cost in reserves of each intervention is also likely to increase, as the lira continues to depreciate. Whatever slowdown in the rate of depreciation the TCMB (Turkish central bank) comes at an arguably too large a cost in FX reserves.”

As long as real interest rates are “deeply negative,” said Piotr Matys, an analyst at InTouch Capital, “the selling pressure on the lira is likely to prevail and the CBRT will be wasting precious FX reserves.” And “despite rapidly rising inflation and the lira rout, the central bank is widely expected to cut rates further on Thursday,” he said, thanks largely to “political pressure on [Central Bank] Governor Kavcioglu to ease monetary policy at all costs.”

This type of currency intervention is not new for Turkey. In the last few years, opposition party members say Turkey’s government has spent some $128 billion trying to prop up the lira and failed, seeing as the currency has still plummeted in value in that time.

A public protest campaign was started in 2020 with the help of the hashtag “#128milyarnerede,” meaning “Where’s the 128 billion?” The precise $128 billion figure is still a subject of debate. Posters bearing that number displayed in parts of Turkey last spring were quickly torn down by police, and deemed to be an “insult” to Erdogan, which is considered a crime in the country.

The central bank simply does not have enough resources to effectively stem the lira’s fall this time around, said Nick Stadtmiller, director of emerging markets strategy at ‎Medley Global Advisors in New York.

“The result of the previous interventions is that ‘true net reserves’, the amount of FX reserves at the central bank minus liabilities and FX swaps, is deeply negative. Hence the CBRT does not have the firepower to intervene in the same magnitude again,” Stadtmiller said.



Many analysts within and outside of Turkey are now asking the same question that Tim Ash, emerging markets strategist at BlueBay Asset Management, asked in early December: “Intervention failed in 2018-19, so why would it work now?”

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