Turkey’s cen­tral bank strug­gles with lira slide

Enterprise - - International news -

For some of Turk­ish Pres­i­dent Tayyip Er­do­gan´s aides, the mere sug­ges­tion that the cen­tral bank should raise in­ter­est rates as the lira slides through new record lows amounts to a plot against the state.

“It is clear the goal is to bot­tle­neck the coun­try´s econ­omy,” Er­do­gan´s ad­viser Bu­lent Gedikli said in re­sponse to a state­ment from the Ja­pan Credit oat­ing Agency (JCo) in­di­cat­ing in­vestors might welcome a hike.

“It is open to de­bate how right it is to in­ter­vene in a float­ing-rate sys­tem and if it is to be done, should it be just by hik­ing rates and de­stroy­ing growth?” he said, sug­gest­ing there were other, bet­ter ways.

Less than an hour later, the cen­tral bank took the sort of step he seemed to have in mind, cut­ting banks´ forex re­serve re­quire­ments in a move it said would in­ject $1.R bil­lion into the sys­tem in a bid to ease pres­sure on the lira.

The move won a “thumbs-up” emoji from Gedikli. The cur­rency firmed briefly, but later re­sumed its slide, in what in­vestors say is a sign that such steps may be un­able to stem the de­cline with­out an out­right rate hike.

The lira has fallen 6.8 per­cent to the dol­lar since the start of the year, and has now lost al­most a quar­ter of its value since a failed coup last July. It weak­ened be­yond 4.0 to the euro for the first time.

The spill-over from neigh­bour­ing Syria´s civil war, bomb­ings by Is­lamic State and Kur­dish militants, the coup at­tempt, un­cer­tainty over a planned ref­er­en­dum that would hand Er­do­gan greater pow­ers, and the first quar­terly eco­nomic con­trac­tion in seven years have all taken their toll. Turkey´s large ex­ter­nal bor­row­ing re­quire­ment also makes the lira one of the cur­ren­cies most vul­ner­a­ble to tight­en­ing by the U.S. Fed­eral oe­serve. But com­pound­ing all of these is the sense that Er­do­gan´s aver­sion to high in­ter­est rates means that the cen­tral bank is un­able to do the one thing that might stem the routW hike rates sharply enough.

The bank is un­likely to be able to mount a sus­tained de­fence of the lira us­ing its for­eign cur­rency re­serves; these to­talled around $92 bil­lion at the end of last year, but an­a­lysts´ cal­cu­la­tions sug­gest us­able lev­els are around a third of that.

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