Turkey’s lira hit a record low of 7.32 against the dollar after losing nearly 19 percent against the greenback so far this year, with growing concern that state efforts to stabilize the currency could fizzle and spark bigger problems for the country’s economy.
“Such a breakout indicates that whatever intervention mechanism had kept the exchange rate flat has failed,” said Tatha Ghose, forex and emerging markets analyst at Commerzbank.
The country’s central bank has started lifting some funding costs and analysts said it could go further on Aug. 7, tightening such backdoor policy tools to head off more lira weakness.
President Recep Tayyip Erdoğan, whose 17-years in power have been marked by cheap credit and booming growth, has repeated the unorthodox view that high rates cause inflation and sacked Central Bank head Murat Uysal’s predecessor for not following his instructions.
“The various capital controls and restrictions, which Turkish policymakers were using, obviously no longer suffice to keep the lira stable … only a qualitative turnaround in CBT’s monetary policy regime can stabilise the exchange rate in the medium-term,” Ghose said.
The central bank did not immediately comment on expectations of higher rates or on political pressure. Uysal said last week policy was in line with the central bank’s inflation forecasts and he has said in the past it has policy independence.
Investors, analysts and sources close to Turkey’s central bank say the most direct solution to the lira’s costly slide, in the form of a rate hike, would only happen as a last resort.
Some fear that in a worst-case scenario, interventions to stabilize the lira lose steam as the central bank’s reserves run thin, prompting further depreciation, inflation and a ballooning current account deficit.
“We have a lot of ingredients here to have a full blown crisis,” said Nikolay Markov, senior economist at Pictet Asset Management.
“The hope is to have a more proactive policy response from the central bank.”