Turkish lira hits record low as inflation slowdown fails to convert doubters

Turkey’s lira extended a record low on Friday even after consumer price inflation slowed for the first time in eight months and the central bank pledged tight monetary policy.

The currency’s renewed weakness - it has hit successive all-time lows over the past week - reflects the doubts Turks feel over the economic outlook and the accuracy of inflation data. Foreign investors are also fleeing Turkish markets, pointing to political interference in monetary policy.

The lira dropped by 0.6 percent to 8.748 per dollar in morning trade, taking losses since-mid March to 18 percent. The lira is the worst-performing major emerging market currency this year after the crisis-hit Argentinian peso.

Inflation slowed to 16.6 percent in May from 17.1 percent in April, according to official data published on Thursday. The figure was lower than the prediction of every economist polled by Bloomberg and Reuters. The surveys forecast an acceleration in inflation.

The lira’s weakness is mirroring the lack of confidence among Turks and foreign investors in Turkish institutions including the government, central bank and the Turkish Statistical Institute (TÜİK), which is charged with calculating inflation and other major economic indicators.

"The problem with the numbers now is credibility. Locals don’t believe inflation really is this low so will not stop dollarising. Foreigners just don’t trust Erdoğan around monetary policy so portfolio inflows will not come. So the lira will remain weak," said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London and a veteran Turkey-watcher.

President Recep Tayyip Erdoğan, who won vast new executive powers at elections in 2018, has sacked three central bank governors in less than three years. He dismissed former Finance Minister Naci Ağbal in the middle of March after he increased interest rates to tackle inflation. Erdoğan replaced Ağbal with Şahap Kavcıoğlu, an academic with no previous central bank experience who has sympathised with his unconventional view that high interest rates lead to higher inflation.

Last year, the central bank kept interest rates at below inflation to help the government engineer a borrowing boom. That led to a sell-off in the lira, forcing the bank to spend tens of billions of dollars of its foreign currency reserves. 

On Tuesday, Erdoğan said it was imperative that the central bank lower interest rates of 19 percent in July or August. His comments prompted a sell-off in the lira.

Since Kavcıoğlu’s arrival, three other officials sitting on the central bank’s seven-member monetary policy committee have been replaced, as well as the heads of several key central bank departments, including those responsible for statistics, research and banking.

Erdoğan hired a new chief of TÜİK in early March and has dismissed several other senior members of the institution, which is supposed to operate free of political interference.

On Thursday, TÜİK reported inflation of 1.44 percent month-on-month. Later in the day, it corrected the number to 0.89 percent, citing an error in data entry.

The figures stood in sharp contrast to data published by ENAG, an independent research group led by academics. Prices increased by a monthly 3.94 percent, ENAG said in a statement. In the first five months of the year, inflation totalled 16.1 percent, it said.

ENAG says it calculates inflation by using virtually the same items as TÜİK. Last month, news broke that TÜİK had filed a criminal complaint against ENAG accusing it of misleading the public.   

Turks have been selling liras for dollars, euros, cryptocurrencies and gold to help protect their savings against inflation and losses for the lira. Banks are providing scant returns for investors. Average interest rates on one-month lira time deposits stand at an annual 17.39 percent, less than 1 percentage point above inflation, according to central bank data.

“Unless the authorities reverse policy missteps, growing domestic loss of trust in the currency risks structurally higher inflation and balance of payment problems longer term,” Dennis Shen, lead analyst for Turkey at Scope Ratings, said in a report this week.

Consumer confidence in Turkey fell to a two-year low of 77.3 points last month, TÜİK said on May 21. Any reading below 100 reflects pessimism among householders. The decline was led by the outlook for the general economic situation in the country.

A similar poll of consumers by financial news channel BloombergHT published this week showed confidence at an 11-year low of 55.2 points.