Turkey’s currency crisis deepens after Erdogan’s latest interest rate cut

Turkish Lira

Mehmet Kalkan

Turkey’s currency crisis accelerated on Friday as it fell 8% to a new record low on fears of an inflationary spiral caused by President Tayyip Erdogan’s unorthodox plan to cut interest rates as prices skyrocketed.

The lira touched 17.0705 against the dollar, triggering direct central bank intervention in the market to support the undervalued currency of Turkey – the fifth attempt this month to tackle what the country calls “unfair” prices.

The bank’s dollar buying reduced the lira’s loss to 16.5 by 11:16 GMT. At this rate, it’s still lost 55% of its value this year – including 37% in just the past 30 days – deeply destabilizing the major emerging market economy.

Erdogan’s decision to ease monetary policy by 500 basis points since September, including another major cut on Thursday, has sent inflation soaring above 21%. Economists say a 30% jump is likely next year due to soaring import prices and an urgent increase in the minimum wage.

“With Erdogan seemingly becoming more and more entrenched in his anti-interest stance, the longer the currency crisis drags on, Turkey could exceed the threshold of no return,” said Patrick Curran at Tellimer. Patrick Curran at Tellimer said, describing the lira as completely disconnected from the fundamentals.

He said of the possibility of reinvesting in Turkish assets: “We are not ready for the falling knife yet. “As long as Erdogan remains in power, nothing can stop the lira from continuing to depreciate.”

The impact was swift and painful as Turks watched their savings and income vanish.

Erdogan announced a 50% increase in the minimum wage to 4,250 lira ($275) per month next year. But that is expected to boost overall consumer price inflation by 3.5 to 10 percentage points.

The wage increase affects about six million workers, but due to the steep depreciation of the lira, the new minimum wage is still lower than the equivalent of $380 a year earlier.

“We believe that the current policy mix is ​​fundamentally unsustainable,” Maxim Rybnikov, director of sovereign ratings for the EMEA region at S&P Global Ratings, said in a webcast.

Re-evaluate the policy framework

The rapid and amazing market meltdown has outstripped Turkey’s currency crisis in 2018, triggering a deep but brief recession.

Turkey’s dollar-denominated sovereign bonds face pressure, with some of the older issues falling as much as 1.3 cents, according to Tradeweb. Spreads across US Treasuries widened to 579 basis points on the JPMorgan EMBI index, up 28 bps from last Friday’s close.

Data from IHS Markit showed that five-year credit default swaps rose 3 bps from Thursday to 529 bps, the highest level since Dec.

The central bank’s 100 basis point cut on Thursday sent Turkey’s real rate deeper into negative territory.

The Bank has signaled that it will pause the easing cycle to monitor its impact over the next three months, when “all aspects of the policy framework will be reassessed to lay the groundwork for stability.” sustainable prices,” it said.

“Maybe that means other interest rate channels might be on the lookout,” Rybnikov said. Central banks have in the past used interest rate corridors to set interest rates.

If the rate-cutting cycle continues, Rybnikov added, capital controls are likely to increase. “These are not our baselines…we believe that as a policy measure they should be used as a measure of last resort.”

Although Erdogan has rejected pleas even within his government to reverse course, traders predict it will have to come soon. The 10-year benchmark yield has nearly doubled to 22.5% from around 12% at the start of the year.

Wall Street bank JPMorgan predicts a sharp 12 percentage point increase in interest rates next year, far higher than any of its Turkish peers.

The central bank has come under pressure from Erdogan to cut interest rates to boost economic growth, lending and exports under his new economic plan.

Economists and opposition lawmakers have widely criticized the policy as reckless.

The central bank has intervened in money markets four times in the past two weeks, selling dollars to slow the lira’s slide and eating up already depleted foreign exchange reserves.

The lira has also fallen 51% against the euro and 54% against the pound this year. Turkey’s currency crisis deepens after Erdogan’s latest interest rate cut

Emma James

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