Turkish lira plunges to near 11 as central bank ploughs on with cuts

ISTANBUL (Reuters) – Turkey’s lira sank to another all-time low of near 11 to the dollar on Thursday as the central bank pushed forward with an interest rate cut that analysts say ignores a dangerous market meltdown and inflation running near 20%.

The lira slipped to 10.98 against the dollar in volatile trade before paring some losses to trade at 10.84. The currency has suffered a more than 10% drop since the start of November, making it the worst month for the currency since the August 2018 lira crisis.

Policymakers – which are under pressure from President Tayyip Erdogan for stimulus – cut the key rate by another 100 basis points to 15%. The bank has bucked expectations and slashed rates now by 400 points since September.

“The sharp falls in the lira over the past few days clearly weren’t enough for Turkey’s central bank to stand up to President Erdogan,” said Jason Tuvey at Capital Economics.

“How events unfold from here is extremely uncertain.”

The currency has shed 32% this year over concerns about premature and risky monetary easing. Erdogan stoked the selloff on Wednesday when he pledged to continue his battle against interest rates “to the end”.

The lira is the worst performer in emerging markets in recent years. The latest meltdown is the sharpest since March when Erdogan sacked a former hawkish central bank chief, Naci Agbal. In the midst of a 2018 crisis, the currency shed more than 25% in a week.

‘ENORMOUS UNCERTAINTY’

Reverberations of the latest cut have rippled through Turkish assets.

Sovereign dollar bonds fell with the 2030 issue falling 1 cent in the dollar to trade at 131.9 cents, Tradeweb data showed.

The premium demanded by investors to hold Turkey hard-currency bonds over U.S. Treasuries on the JPMorgan EMBI Global Diversified index stood at 497 bps having blown out by 33 bps over the past 10 days.

Meanwhile the cost of insuring exposure to the country’s debt through credit default swaps jumped to 438 bps, the highest since Nov. 1 and lira volatility gauges raced higher, some hitting the highest level since early April.

Local bond yields have climbed sharply since the easing cycle began, with Turkey’s 10-year benchmark bond yield climbing to as much as 19.5%, from Wednesday’s close of 18.95%.

Erdogan’s insistence on cutting rates and his frequent overhauls of the central bank’s leadership have severely damaged monetary credibility in recent years, battering the lira.

The central bank says price pressures are temporary. Its rate cuts have left Turkey virtually alone in a world of policy tightening, but they delivered stimulus long sought by Erdogan who has called for a boost to exports and credit.

The lira has lost more than 65% in the past four years, a decline that eats into the earnings of Turks along with mostly double-digit inflation. Depreciation also pushes prices higher in Turkey via imports.

Turks have cited economic mismanagement in opinion polls that show Erdogan’s support at multi-year lows. Elections are due no later than mid-2023.

“I am hopeless for the future. We are in a desperate situation,” said Merve Tektas, 27, a tax auditor in Istanbul. “I intend to change my investment and invest in bitcoin.”

Pushing for more rate cuts “defies all logic,” unless one considers that Erdogan is seeking re-election, said Damien Buchet, CIO of the Total Return Group at Finisterre Capital.

“In terms of political economic priorities (Erdogan) should understand that inflation is doing him much more damage than the perceived lack of growth and credit,” he said.

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