Turkish lira hits new depths ahead of another expected rate cut

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ANKARA – Turkey’s lira weakened 1.3% on Tuesday to a new record low of 10.22 against the dollar, weighed down by expectations of another interest rate cut by a central bank that analysts say is buckling to political pressure.

The lira has shed 27% this year, the worst performer in emerging markets, mainly over investor concerns about President Tayyip Erdogan’s influence on monetary policy and what many call a premature and risky easing cycle.

The central bank is expected to cut its key rate to 15% from 16% this week, according to a Reuters poll, though inflation remains near 20%.

The bank has said inflation pressure is temporary and has slashed rates by 300 basis points since September. That was when the lira selloff gained steam and, in turn, stoked prices via Turkey’s heavy imports.

Erdogan frequently calls for lower rates to boost the economy and has rapidly overhauled the bank’s leadership, including firing its governor early this year and another three monetary policy committee (MPC) members last month.

The “weakening lira is exacerbated by existing extensive economic mismanagement, driven by consolidation of power of President Erdogan,” said Dennis Shen, director of the sovereign and public sector at Scope Ratings.

The selloff “represents a severe problem” given the private-sector’s net $124 billion in foreign currency liabilities and the government’s 58% foreign outstanding debt – “a share that continues rising as the currency depreciates,” he said.

The lira has also been hit over the last week by the dollar firming after higher-than-expected U.S. inflation data.

Finance Minister Lutfi Elvan said on Tuesday that Turkey was determined in its battle with inflation, but that it had not reached desired levels yet.

“The global cycle and domestic outlook show that we need to be very careful in the battle with inflation,” he told an event in Istanbul, adding: “It is important for every institution to do its responsibilities within its area of duty.”

Odile Renaud-Basso, president of the European Bank for Reconstruction and Development, told Reuters investors need to see a clear and credible policy framework in Turkey.

She had raised the issue of very high inflation with Erdogan during a visit last week, Renaud-Basso added.

Reuters

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