Turkish lira extends rout as central bank signals no hardening of policy

Turkey’s lira hit a fresh record low on Wednesday after the central bank failed to convince investors that it was prepared to take the measures necessary to reverse a nine-week sell-off, the longest since 1999.

The lira dropped to as low as 8.3224 per dollar in Istanbul, taking losses this year to almost 29 percent. It traded down 1 percent at 8.2669 per dollar in late afternoon local time.

Raising memories of central bank inaction during a currency crisis in 2018, Central Bank Governor Murat Uysal said he expected pressure on the lira to ease and that the bank stood ready to tighten monetary policy when needed.

“Uysal speaks and the lira continues to weaken, now through 8.25. The question is at what level is the central bank going to actually do something? 8.50? 9? 10?” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London.

The governor was speaking to reporters less than a week after the central bank elected to leave the benchmark interest rate unchanged at 10.25 percent at a monthly meeting. Nearly every economist following Turkey had expected a hike. Instead, the bank decided to tighten monetary policy through a so-called “interest rate corridor” within which it lends at multiple rates of interest.

Quizzed about the lira’s losses against the dollar, Uysal said that the central bank did not have a target level for the currency. The bank’s “tight monetary policy stance” would continue, while pressure on the lira was expected to ease going forward, he said.

murat uysal
Turkish Central Bank Governor Murat Uysal

The central bank has spent tens of billions of dollars of its foreign exchange reserves this year to help prop up the lira. But despite a rate hike in September, it has kept the benchmark interest rate at below annual inflation, which stands at 11.8 percent, offering investors and bank deposit holders little incentive to keep the currency.

Uysal said that state-run banks would continue to be active in the currency markets. The central bank has engaged in cross-currency swaps with the lenders to intervene in the market indirectly, leaving its net reserves of foreign currency in negative territory when subtracting its liabilities.

Durmuş Yılmaz, who ran the central bank between 2006 and 2011, warned earlier on Wednesday that the lira was set to fall further in a possible repeat of a financial crisis in 2001. Yılmaz is credited with helping to slow Turkey’s historically high inflation to record lows through hikes to the benchmark rate,

Turkey was forced into a $19 billion International Monetary Fund loan rescue in May 2001 and to start selling off companies cheaply to foreigners and their local partners. The fallout from that turmoil helped Turkish President Recep Tayyip Erdoğan’s governing Justice and Development Party (AKP) win general elections the following year when annual inflation stood at around 30 percent.

Erdoğan has ruled out a return to the IMF. His son-in-law, Treasury and Finance Minister Berat Albayrak, told representatives of foreign companies on Tuesday that the government was seeking a “competitive lira” to help Turkish firms export more goods. He also said he expected a fresh wave of foreign investment into the country to help bolster the economy, which he said was recovering strongly from the negative impact of the COVID-19 pandemic.

Yılmaz, who is now a senior member of an opposition party, said Albyrak’s prediction, if true, would likely amount to a bargain-basement sale of Turkish firms because the lira would continue to tumble.

The central bank has kept interest rates low, instead electing to sell foreign currency to support the lira, partly because Erdoğan says that higher borrowing costs are inflationary, a stance that jars with conventional economic wisdom. He sacked Uysal’s predecessor Murat Çetinkaya last July after he failed to cut interest rates to support a lending spree by state-run banks.

Uysal said there was a possibility Turkey’s central bank could sign swap deals with monetary authorities abroad to help bolster its reserves of foreign currency and the lira. He provided no further details.

In May, Turkey’s close regional ally Qatar tripled a swap deal with Ankara to $15 billion to help steady the lira. It had pledged $5 billion in 2018, when the currency crisis ripped through financial markets, provoking a deep economic recession.

“Turkey does not need new FX swap arrangements, it needs proper central bank policy making,” Ash said.

(This story was updated with latest lira price in the second paragraph.)