Turkish lira hits record low on lax monetary policy, foreign currency debt

Turkey’s lira hit an all-time low against the dollar and euro on Friday on concerns about lax monetary policy and ahead of hefty foreign currency debt repayments.

The lira fell 1.1 percent to 8.59 per dollar, beating a previous record of 8.58 per dollar set in early November. It dropped to 10.46 against the euro.

The embattled currency has slumped 16 percent since mid-March, when President Recep Tayyip Erdoğan sacked the head of the central bank the day after he raised interest rates. Since then, foreign investors have sold billions of dollars of Turkish stocks and bonds on fears that the bank will cut rates of 19 percent prematurely.

Inflation in the country accelerated to 17.1 percent in April, the highest level in major emerging markets outside of crisis-hit Argentina, which is implementing an International Monetary Fund rescue programme.

“Each burst of depreciation risks triggering a fresh lira crisis as it begins to feed back into higher inflation, which the central bank cannot fight off because it is unable to credibly hike rates,” Tatha Ghose, senior emerging markets economist at Commerzbank, said in a report to investors.

On Thursday, the World Bank urged Turkey to keep monetary policy tight, saying it was the only way for the government to ensure strong and sustainable economic growth. The central bank kept interest rates at below inflation for much of 2020 to help the government engineer a borrowing boom via state-run banks.

“The outlook this year is very uncertain and hinges on the course of policy … especially monetary policy and the effectiveness of COVID control measures,” World Bank senior economist David Knight said at a panel discussion, referring to rising global inflation and a switch to tighter U.S. monetary policy, according to Reuters.

Economists are predicting that new central bank governor Şahap Kavcıoğlu will cut interest rates this year even as inflation remains in double digits, according to a monthly central bank survey. Kavcıoğlu has said he will keep rates at above realised and expected inflation, without providing further details.

Erdoğan, who has sacked three central bank governors in less than three years, says high interest rates are inflationary, an unorthodox theory that has won sympathy from Kavcıoğlu, who had no experience in central banking before accepting the job.

Global inflation is also accelerating as countries emerge from the pandemic. That has pushed up U.S. bond yields, prompting investors to pull capital from more fragile emerging markets such as Turkey. Losses for the lira are increasing the cost of Turkey’s imports, fuelling inflation further.

The lira’s losses are being compounded by locals buying dollars ahead of large foreign currency debt repayments, Bloomberg reported, citing two traders who asked not to be named. Turkish companies are due to repay or roll over $6.9 billion of foreign currency loans in June, central bank data shows.

The lira, which has lost more than half its value since 2018, is also weakening during renewed political uncertainty. Opposition parties are calling for early elections after a mafia boss made allegations of underworld links against government officials including the interior minister. Erdoğan has responded, saying presidential and parliamentary elections will take place as planned in 2023.

International credit agency Standard & Poor’s was due to review Turkey’s junk ‘B+’ debt rating later on Friday. The market is pricing Turkey two notches below S&P’s rating in the debt swaps market, Reuters said.