Mar 28 2018

Turkish lira hits 4 per dollar as central bank hesitates

Turkey’s lira hit 4 per dollar on Wednesday, close to a record low of 4.03 reached last week, as investors bet that the country’s central bank would not react to currency weakness by raising interest rates.

The currency fell to as low as 4.0038 per dollar and traded 0.4 percent lower at 3.992 at 2:29 p.m. in Istanbul.

Selling lira assets for dollars is becoming a risk-off option for investors concerned that the prospect of monetary tightening by the U.S. Federal Reserve and European Central Bank will bring a swing in sentiment towards emerging markets. Turkey has a current account deficit equal to about 5.5 percent of economic output, the widest among its peers, and inflation in double digits.

And unlike other central banks, Turkish central bank policy is constrained by politics. The government of President Recep Tayyip Erdoğan wants lower interest rates to stimulate economic growth ahead of elections next year. In lowering Turkey’s credit rating one notch to two levels below investment grade this month, Moody’s warned of institutional weakness in Turkey caused by Erdoğan’s increasing authority over economic decision-making.

Writing in Hurriyet newspaper on March 20, leading Turkish columnist Erdal Saglam said the central bank may intervene and hike interest rates should the currency weaken beyond 4 per dollar, possibly in an emergency meeting.

On Friday, Turkish President Recep Tayyip Erdoğan’s senior economic adviser Cemil Ertem maintained that any trade in the lira at 3.85 per dollar or weaker is speculative. Friday's record low of 4.03 was reached in thin Asian trading and therefore shouldn't be counted as such, he said.

But some analysts disagree.

Ferhan Salman, Turkey economist at Bank of America Merrill Lynch, said last week that the lira may be overvalued by 15 percent on a trade-adjusted basis, according to the FT.

William Jackson, an emerging markets economist at Capital Economics in London, said on Friday that the central bank was unlikely to tighten monetary policy at levels of 4 per dollar. The currency would probably need to weaken to 4.25, equating to currency depreciation of 10 percent over a three month period, before it acts, he said, according to Bloomberg.