Turkish lira drops on Syria, concerns about rate cuts

(Story updated with Russia talks in fifth paragraph, consumer confidence in eighth, economist in ninth.)

Turkey’s lira fell against the dollar on Thursday, extending the lowest levels since May, as investors and retail clients fretted over military tensions in Syria and loose monetary policy.

The lira weakened to as low as 6.1 per dollar in Istanbul. It traded down 0.2 percent at 6.09 per dollar as of 1:32 p.m. local time.

Turkish President Recep Tayyip Erdoğan threatened on Wednesday to send more soldiers into the province of Idlib in northwest Syria and attack Syrian troops, raising concern for a widening of the conflict to include Russia, which backs President Bashar Assad. He gave Assad’s government until the end of the month to withdraw its forces back to a ceasefire line agreed with Russia in Sochi in 2018.

The main BIST-100 index of shares also declined, falling 0.8 percent to 118,239 points. Banking stocks such as Garanti BBVA led the drop.

In an effort to alleviate tensions, Turkey and Russia are discussing conducting joint patrols in Idlib to ensure security in the region, Reuters reported on Thursday, citing an unidentified Turkish official. Iran, Turkey and Russia plan to meet in Tehran early next month to further discuss Syria, including Idlib, the official said, adding that a Russian delegation may visit Ankara before that.

Turkey’s central bank cut interest rates to 10.75 percent from 11.25 percent on Wednesday, reducing banks’ borrowing costs for the sixth-straight meeting. But the lower interest rates – they stood at 24 percent in July – reduce returns for investors from local bonds and for Turks who hold their money in interest-earning lira deposit accounts.

Erdoğan's government is seeking to use lower interest rates to boost economic growth to 5 percent this year. But an economic recovery from a currency crisis in 2018 is proving challenging, despite a flood of cheap loans from state-run banks.

Consumer confidence edged down to 57.3 points in February after flatlining the previous month at 58.8 points, according to data published by the Turkish Statistical Institute on Thursday. Any reading below 100 reflects pessimism about the future.

The central bank will probably cut interest rates again to help the government provided the lira remains stable, Muhammet Mercan, chief economist for Turkey at Dutch bank ING, said in a report.