May 24 2018

Turkish lira resumes decline day after rate hike

The lira fell the day after Turkey's central bank raised interest rates to halt a meltdown that was pressuring double-digit inflation.

The currency declined 1.8 percent to 4.66 per dollar at 9:15 a.m. in Istanbul, reversing gains made late on Wednesday after the central bank increased its key policy rate by 300 basis points to 16.5 percent. The currency had reached an all-time low of 3.92 earlier that day, falling as much as 5 percent.

Losses for the lira on Thursday exceeded those of the currencies of other emerging markets. The South African rand fell 0.3 percent, the Russian ruble 0.2 percent and the Polish zloty less than 0.1 percent.

Turkish Central Bank Governor Murat Çetinkaya and his deputies finally acted to raise interest rates at the emergency meeting, responding to calls from investors to tackle Turkey's widening current account deficit and an inflation rate of 10.9 percent, which is more than three times the emerging-market average.

In comments on Twitter, Hatice Karahan, an economic adviser to President Recep Tayyip Erdoğan, said Turkey would comply with global norms for monetary policy and address the current account deficit and inflation after snap presidential and parliamentary elections on June 24. In comments to members of his governing Justice and Development Party (AKP) late on Wednesday however, Erdoğan pledged to continue with policies to spur economic growth after a raft of stimulus measures in recent months.

Erdoğan had unnerved investors last week, saying in London that he would seek to reduce interest rates after the elections and reiterated that higher interest rates were inflationary.

It is questionable whether Wednesday’s rate hike will steady the lira in the coming days and weeks amid an emerging-market sell-off. The central bank is due to hold its next regular meeting on interest rates on June 7.

Last week, Turkey was labelled by ratings agency Fitch as one of the three most vulnerable emerging market economies along with Argentina and Ukraine. Investors are selling the assets of developing nations as the U.S. Federal Reserve raises interest rates.

Turkish corporates are also selling liras for dollars as they service about $227 billion in foreign currency debt that has become more expensive as the currency lost value. The lira has declined about 20 percent against the dollar this year.