Turkey’s bank tries to check its currency’s slide

Istanbul TURKEY’S central bank lowered the cost of dollar borrowing for a fourth time this year, seeking to halt the lira’s slide after the breakdown of talks on the formation of a new government sent financial markets tumbling.

The rate for commercial banks’ dollar borrowings was lowered to 2.75 percent from 3 percent, the central bank said on Friday. The currency slumped to a record low after President Recep Tayyip Erdogan’s chief adviser said the lira was “competitive” at 3 (R13.5571) per dollar, or about 6 percent weaker than Friday’s opening price.

Governor Erdem Basci is set to announce the monthly decision for benchmark interest rates on Tuesday.

Investor sentiment toward Turkey has soured since the ruling AK Party lost its parliamentary majority in June, and a fragile three-year truce with autonomy-seeking Kurdish militants collapsed last month.

The central bank’s move would not be enough to support the lira against that backdrop, said analysts including Yeliz Karabulut, a vice-general manager at Alan Menkul Degerler in Istanbul.

“These are fringe tools that the central bank is playing with and the market won’t take any notice,” Karabulut said.

“There’s an uncertain period ahead of us until Turkey holds repeat elections, and it will be a period of continued lira weakness.”

Prime Minister Ahmet Davutoglu, who is also the head of the governing AK Party, said on Thursday that negotiations with the main opposition CHP to form a government had failed.

Opinion polls show that a fresh election might not deliver the mandate Davutoglu is seeking for the AKP, potentially returning the country to the same political impasse of the past two months.

Davutoglu said parliament should quickly agree to a new poll to limit damage to the economy. Lawmakers should ignore the August 23 deadline for forming a government based on the results of the June election, he said.

In addition to the lower rate for dollar borrowings, the interest rate for dollar reserves held at the central bank was increased to 0.23 percent from 0.21 percent.

The bank might try to reduce the supply of lira in the short term, and also increase the amount of foreign currency sold through auctions, but was unlikely to intervene directly, Pinar Uslu, a strategist at ING Bank in Istanbul, said.

The lira comment by the president’s chief adviser Cemil Ertem was “really damaging”, Tim Ash, the head of credit strategy for Europe, Middle East and Africa at Nomura in London, said on Friday.

He predicted Turkey’s currency would test Ertem’s level of 3 per dollar before elections. – Bloomberg