Turkey rate cut pushes lira to record lows

Turkey’s lira hit an alltime low against the dollar on Friday, a day after the central bank unexpectedly cut interest rates, reinforcing growing concern over President Tayyip Erdogan’s influence over monetary policy.

The currency, prone to abrupt depreciations and an emerging-markets laggard for several years, closed at a session low of 8.8995 per dollar, compared to its previous record low close of 8.775 in late June and intraday low of 8.88 from early June.

The central bank’s abrupt move on Thursday to ease monetary policy as Erdogan has sought, despite a runup in inflation, sparked an almost 3 per cent drop in the currency this week. This month’s drop is 6.5 per cent so far.

Foreign investors fleeing the currency drove the fall, but local bargain hunting mitigated the effect, traders said.

After a currency crisis in 2018 and a series of smaller sell-offs, the lira has shed two-thirds of its value in five years, eating into the earnings of Turks who have also faced double-digit inflation for most of that period.

Volatile trade

On Thursday, the lira fell in volatile trading when the central bank slashed its key interest rate by 100 basis points to 18 per cent, despite headline inflation of 19.25 per cent last month, well above a 5 per cent target.

The bank cited core price measurements, which had dipped below 17 per cent, but provided no guidance on policy. Barclays, JPMorgan and Goldman Sachs said they expect more rate cuts in coming months.

“This sharp fall in the lira is a clear signal from market participants that the central bank could be making a policy mistake at a time when headline inflation is so high,” said Piotr Matys, senior FX analyst at InTouch Capital Markets.

After a years-long exodus of foreign funds from Turkish assets, the lira’s fate is largely in the hands of local businesses, investors and savers.