Turkish lira slides to record high after rate cut

Turkish lira banknotes are seen in this illustration taken in Istanbul, Turkey November 23, 2021. REUTERS/Murad Sezer/Illustration

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ISTANBUL, Aug 19 (Reuters) – The Turkish lira slipped to a historic low on Friday as traders continued to sell the currency after the central bank’s surprise interest rate cut the day before amid inflation nearing 80% .

Analysts and bankers said Thursday’s cut to 13% from 14% was the central bank pouncing on booming and potentially record tourism revenues, and also suited President Tayyip Erdogan’s long-term drive to cut tourism revenues. borrowing costs.

Fears that the decline could only fuel inflation further drove the lira down 1% on Thursday to 18.15 against the dollar.

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It stood at 18.0870 at 1553 GMT on Friday, leaving it just above the record low of 18.40 to the dollar it hit in December during the last major crisis. It had been a brief “intraday” low, however, and the currency set a record close at 18.089 on Thursday.

“In our view, more important than the rate cut was the central bank’s signal that it was not comfortable with the recent slowdown in loan growth and that it wanted to return to the short-term growth boost,” said Deutsche Bank’s Fatih Akcelik.

He added that if this were to prove correct, it would likely worsen the country’s current account deficit and drive down the lira in the coming months.

“We still expect a sharp depreciation of the pound to lead the BCT (central bank) to raise its key rate in the last quarter of this year,” Akcelik said.

The central bank’s cut on Thursday had lowered its key rate by 100 basis points and was its first move of the year. Read more

There had been no advance signal that he was coming, although the country’s badly depleted foreign exchange reserves had nearly tripled since early July to $15.7 billion, as tourists locked in by COVID-19 over the past two years have poured in.

“It is important to assess the rate cut decisions as well as the increase in foreign exchange reserves over the past two weeks. Tourism is very strong and foreign exchange earnings through exporters are high. Outside of that, there’s an inflow from Russia of about $5-6 billion,” a senior banker said.

“The central bank might think that reserves are going to rise further. I want to think that they took the risk of the rate cut with a guaranteed flow of foreign funding,” added the banker, who spoke under the guise of ‘anonymity.

THE PATH OF ERDOGAN

Rather than tackling the highest inflation in 24 years with rate hikes, as is the approach of other central banks, the Turkish bank is leading Erdogan’s political stimulus economic program to promote exports, investment and economic growth.

Exports, boosted by targeted low borrowing rates, have in turn increased. In addition to foreign entries, Turkey’s tourist season is poised to almost match pre-pandemic numbers. Traders are also speculating that a funding deal has been reached with Russia, although authorities have not commented.

JPMorgan analysts called the rise in rates “opportunistic (and) driven by the fact that net and gross foreign exchange reserves rose…probably due to a combination of tourism revenue which reduced the deficit of the CA … and deposits in USD from the Russian Rosatom for a nuclear power plant project.

In a sign of market stress, Turkey’s 5-year credit default swaps rose to 792 basis points from 656 a week ago. Yet, reminiscent of how investors have fled Turkey in recent years, volatility gauges have only risen slightly.

The central bank cut rates by 500 basis points late last year, triggering a currency crisis in December that pushed inflation up. The lira has lost more than 27% against the greenback so far this year and more than 90% over the past decade.

The bank’s policy-setting committee said it had to act because leading indicators pointed to a loss of economic momentum in the third quarter and the new key rate was “adequate for the current outlook”.

Goldman Sachs analysts said in a note that Turkey’s macroeconomic policy mix had become more unsustainable with the latest decision and expected annualized inflation to reach over 90%.

Ratings agency Fitch, which has repeatedly downgraded Turkey in recent years, said its continued negative outlook on the country’s rating reflects the risks of focusing on growth despite the deterioration in the economy. environment.

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Reporting by Ezgi Erkoyun and Nevzat Devranoglu in Istanbul Additional reporting by Marc Jones in London Writing by Jonathan Spicer Editing by Mike Harrison and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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