Pound hits record highs as rate cut puts Turkey on uncertain path

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A bureau de change in Istanbul. The Turkish lira hit an all-time low against the dollar on Friday, a day after the central bank unexpectedly cut interest rates.
Image credit: AFP

Ankara: The Turkish lira hit an all-time low against the dollar on Friday, a day after the central bank unexpectedly cut interest rates, reinforcing growing concerns over President Tayyip Erdogan’s influence on monetary policy .

The currency, prone to sharp depreciations and trailing emerging markets for several years, closed at a session low of 8.8995 per dollar, from its previous record low of 8.775 in late June and the intraday low of 8.88 in early June.

The brutal central bank decision on Thursday to ease monetary policy as Erdogan wanted, despite rising inflation, triggered a nearly 3% drop in the currency this week. This month’s drop is 6.5% so far.

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

After a currency crisis in 2018 and a series of massive sell-offs, the pound has lost two-thirds of its value in five years, chipping away at the incomes of Turks who have also faced double-digit inflation for most of this year. period.

On Thursday, the pound plunged into volatile trading as the central bank cut its policy rate 100 basis points to 18%, despite headline inflation of 19.25% last month, well above a target of 5%.

The bank cited base price measures, which had fallen below 17 percent, but provided no policy guidance. Barclays, JPMorgan and Goldman Sachs have said they expect more rate cuts in the coming months.

Strategy error?

“This sharp drop in the pound is a clear signal from market participants that the central bank could make a policy error at a time when headline inflation is so high,” said Piotr Matys, senior currency analyst at InTouch Capital Markets.

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

Turks’ holdings of foreign currency and gold have risen steadily in recent years to a record high of over $ 238 billion this month as locals protected their savings.

“The central bank’s decision put the Lira under strong selling pressure. But seeing it as an opportunity, local forex sales of at least $ 1 billion were the main factor limiting the losses, ”said a trader who requested anonymity.

Locals also bought the lira in March when it plunged after Erdogan sacked a hawkish central bank chief and installed Sahap Kavcioglu as governor.

Kavcioglu started giving dovish signals at the start of the month, but few economists polled by Reuters expected Thursday’s decision given the high inflation.

Analysts said if the bank cuts rates too sharply, it will either have to revert to tightening or push state banks to step in to protect the pound.

Foreign investors hold just over 5% of Turkish government bonds, up from over 20% five years ago.


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