Turkey needs to take stronger action as lira posts record lows – ABN Amro
Turkey’s central bank should take more steps to defend the lira as the currency extended a record low this week, Dutch bank ABN Amro said.
Monetary policymakers’ room for manoeuvre is restricted by the stance of President Recep Tayyip Erdoğan, who says that higher interest rates are inflationary. The bank has resorted to tightening policy without increasing the benchmark rate of 8.25 percent, which lies below annual inflation of 11.8 percent.
“We think at some point in time the central bank needs to take stronger action to stabilise the currency,” ABN Amro economists said in a report, foreign exchange news and analysis website FXStreet reported on Monday.
“We expect more weakness in the near-term and some stabilisation followed by a recovery towards the end of this year and next year,” ABN Amro said. “This will also be the result of general dollar weakness.”
The lira fell 0.3 percent to 7.4737 on Tuesday, adding to a record low reached on Monday.
ABN Amro said increasing the main policy rate may at first glance seem like an obvious move.
“However, the central bank under Governor Murat Uysal is under pressure to keep interest rates low, implementing policies supported by President Recep Tayyip Erdoğan, who believes that high-interest rates fuel inflation.”
Erdoğan sacked Uysal’s predecessor in July last year for failing to cut borrowing costs, which had stood at 24 percent. He warned that other dismissals could follow should officials fail to support economic activity. Turkey’s economy had slumped into a recession following a currency crisis in the summer of 2018.
The Turkish president reiterated his opposition to higher interest rates on Monday, saying rates, inflation and foreign exchange were tools of Turkey's adversaries.
The central bank has taken measures such as halving overnight borrowing limits for banks and cutting liquidity for so-called primary dealers in the bond market, which are made up of the country’s largest lenders, to zero. It has also raised reserve requirements.
The policies mean the weighted average cost of borrowing for banks has risen to more than 10 percent from as low as 7.3 percent in July.
But economists say the measures may be insufficient.
“The question is whether these back-door channels will be enough to stop the currency’s decline,” ABN Amro said.
“The current-account deficit, fiscal deficit, weak growth and negative real yields, combined with domestic politics and concerns about the independence of the central bank are all negative for the lira,” it said.