Turkish Lira Slides to Record Low as Central Bank Holds Fire
October 22 2020 - 12:20PM
Dow Jones News
By Caitlin Ostroff in London and David Gauthier-Villars in Istanbul
Turkey's currency hit a record low against the dollar Thursday
after the country's central bank held interest rates steady despite
intensifying pressure to act.
The lira fell 2.1% on Thursday, with $1 buying 7.9792 lira,
after the central bank left its key, one-week repo rate at 10.25%,
surprising the majority of investors and analysts who anticipated
an increase.
For several months, the central bank's main policy rate has been
negative when adjusted for inflation, making holding the Turkish
lira an unattractive proposition for foreign investors and
residents alike. Inflation in Turkey was at 11.75% in September,
according to the central bank.
The lira is one of the worst-performing currencies this year and
has lost a quarter of its value against the U.S. dollar.
Economists have repeatedly called for Turkey to raise interest
rates to compensate for inflation that erodes profits from holding
Turkish bonds and stocks and to keep the currency from depreciating
further. Instead, Turkey slashed interest rates for much of the
year and increased credit to households and businesses. This
increased imports at the same time the coronavirus pandemic has hit
exports.
Last month, Turkey surprised investors by lifting its key rate
to 10.25% from 8.25%. Investors hoped that the central bank would
continue along that path following its September meeting, which
could inspire confidence for foreign investors to return to the
market, said Emre Akcakmak, a portfolio manager at asset manager
East Capital.
While it didn't raise rates, the central bank tweaked another
policy tool that could be used to drain liquidity from the system
-- a type of stealth tightening that may aid in supporting the
lira. It increased the upper rate that banks getting loans from the
central bank can be charged to 14.75% from 13.25%. In recent weeks,
the central bank has pushed banks to facilities that charge higher
rates, increasing the average cost of funding to 12.52%
Wednesday.
Analysts said the move effectively gave the Turkish central bank
more room to raise its average lending rate without formally
increasing the benchmark rate.
"It's temporary tightening," said Timothy Ash, senior sovereign
strategist covering emerging markets at BlueBay Asset Management.
"The market knows it's temporary, and the market wants permanent
tightening."
In 2018, the lira crashed after interest rates slipped below
inflation, with the currency only stabilizing after the central
bank hiked interest rates to 24%. This year, the central bank has
sought to limit the depreciation of the lira by selling foreign
currencies, from its own reserves and dollars borrowed from
domestic banks, and buying the lira. It owes more foreign currency
to the banks than it currently has in its coffers.
The central bank has said it has adequate reserves.
Reluctance to formally raise rates, as well as the central
bank's erosion of reserves to defend the lira, has spooked foreign
investors. About $7.6 billion of foreign money has left the local
currency bond market this year, as well as nearly $5.7 billion from
Turkish stocks.
(END) Dow Jones Newswires
October 22, 2020 12:05 ET (16:05 GMT)
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