Lira is world’s worst performer and times could get harder – Bloomberg

The Turkish lira is the world’s worst performing currency and the situation could worsen if the central bank cuts interest rates on Wednesday, Bloomberg reported.

Tensions with the United States have intensified again because of differences over Syria, meaning the lira is once again under strain, said Bloomberg’s Constantine Courcoulas and Çağan Koç. Inflationary pressures may be returning after the lira lost 5 percent against the dollar since the end of November, meaning that the central bank should keep its benchmark rate of 24 percent on hold, they said.

But a recession, a fall in the inflation rate to 20.3 percent in December and a partial recovery in the lira from August’s record low means political pressure could prompt policymakers to make a cut against economists’ advice.

Analysts were unanimous in predicting no change in rates at a meeting last month, but two of 21 economists are now predicting a decrease, Bloomberg said.

“The lira would probably come under a bit of pressure if the MPC does decide to cut rates, given that it would be a surprise to the markets,” said Jason Tuvey at Capital Economics. What’s more, “there’s a big risk that the central bank of Turkey ultimately lowers rates more aggressively, triggering a sharp sell-off.”

Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said a rate reduction would amount to a “kamikaze” move that could cause the lira to re-enter a tailspin.

The lira lost 28 percent of its value against the dollar last year after concerns about the economy overheating were compounded after the United States imposed sanctions against Turkey for its imprisonment of a U.S. pastor. The economy contracted 1.1 percent on a quarterly basis in the three months to September and consumer confidence continues to deteriorate.

The central bank has vowed to retain its tightening bias and the case for a rate cut has weakened further as tensions with the U.S. re-emerged and the lira underperformed compared with its emerging-market peers, said Inan Demir, an economist at Nomura in London who is ranked as the most accurate forecaster on Turkish rates by Bloomberg.

The lira traded little changed at 5.43 per dollar in Istanbul on Tuesday, down 2.7 percent this month.

https://www.bloomberg.com/news/articles/2019-01-14/wild-lira-ride-awaits-if-dissenters-right-on-kamikaze-rate-cut