Turkey’s lira tumbled to a record low of 8.6 versus the dollar on Friday as it took a hit from global inflation concerns, expectations that the central bank will soon cut interest rates and worries over possible early elections.
The lira – by far the weakest performer in emerging markets this year – slipped beyond its November intraday low of 8.58, marking the latest step in a years-long depreciation that has dogged the Middle East’s top economy.
It recouped some losses and was at 8.575 against the U.S. currency at 10:52 GMT, ahead of a review by S&P Global that could downgrade its Turkey credit rating. It also logged a new nadir of 10.4696 against the euro.
Despite Turkish inflation having risen above 17% in April, the central bank says that should fall and it is expected to lower the policy interest rate from 19% in coming months.
But as the world emerges from the pandemic, global inflation has risen and lifted U.S. bond yields. That in turn pulls funds from emerging markets such as Turkey, hitting the lira and putting more upward pressure on domestic prices due to its heavy imports.
“Earlier than expected (monetary) tightening in advanced economies is the most serious risk for Turkey because the inflationary pressures are mounting across the globe,” said Hakan Kara, former chief economist at the central bank who is now at Bilkent University.
“If there was an early tapering (of U.S. Federal Reserve asset purchases) that would not be good news for emerging economies, especially those facing external fragilities,” he said on a World Bank panel on Thursday.
The lira has tumbled 16% since mid-March when President Tayyip Erdogan abruptly fired a hawkish and market-friendly central bank chief and replaced him with Sahap Kavcioglu, who had criticised recent rate hikes.