The Turkish lira has once again suffered severe volatility as traders are preparing for the central bank’s decision, which will test whether policymakers are willing to take action to deal with the sharp rise in inflation and the rising risk of currency crises.
Earlier in the Asian trading day on Thursday, the exchange rate of the lira against the US dollar fell 3.4% to a historical low of 10.9785 lire. When trading started in London, the currency stabilized at 10.7 lire, but has fallen by 10% in the past three weeks alone.
Cristian Maggio, head of portfolio strategy at TD Securities in London, said that the central bank of Turkey will face a “liquidation moment” when it announces its latest policy decision at 11 am UK time.
A Bloomberg survey of economists shows that the market expects the central bank to cut the main interest rate by 1 percentage point to 15%, thereby extending the interest rate cut cycle that has already cut interest rates from 19% in March.
Although the inflation rate has soared by nearly 20%, Turkish President Recep Tayyip Erdogan has put tremendous pressure on the central bank to ease monetary policy. Currency devaluation tends to aggravate inflation because it raises the price of imported goods, thus forming a vicious circle.
Erdogan held the unorthodox view that high interest rates would lead to rather than moderate inflation, and on Wednesday he again promised to rescue Turkey from the “scourge” of high interest rates.
“I’m sorry our friend [from the ruling party] Who defends [high] Interested, but I cannot and will not follow the same path as them,” he said.
At a time when many other emerging markets, such as Russia, are raising interest rates, Turkey’s loose monetary policy makes the country an outsider. As the world’s most influential central bank, the Fed is also reducing stimulus measures, which puts emerging markets under greater pressure to raise interest rates.
The exchange rate of the lira against the U.S. dollar fell by 30% in 2021, the same as the decline in the painful period three years ago.
“[It] It feels like we are again approaching the currency crisis period in Turkey,” said Tim Ash, emerging market strategist at BlueBay Asset Management. “Of course. [central bank] They cannot cut interest rates later today, and even if they hold them, it is not enough. They need to raise interest rates, and they must raise interest rates aggressively. “
The entry in the country’s official gazette overnight regarding foreign exchange transactions at the Turkish foreign exchange office further disturbed the market.
Turkish officials dismissed wild speculation on social media that the move was a sign of impending capital controls. They stated that the directive is a small technical change to the previous requirement for citizens to show their identity documents at the foreign exchange bureau. They believe that this is actually a liberalization measure, raising the minimum transaction amount for such requirements to 100 US dollars.
“Foreign exchange transactions are carried out freely between buyers and sellers in the market. This [new] Regulation will never interfere with the free market,” the Ministry of Finance said.
An official said that the change has been discussed for several weeks, adding that the government did not expect its publications to be considered “a big problem.”
In recent years, foreign investment in the Turkish market has declined. When Erdogan fired Naci Agbal, the governor of the Central Bank, in March, many international fund managers were severely burnt down. The respectable former bureaucrat started the interest rate hike cycle.
Traders and fund managers said at the time that the dismissal caused the currency to fall sharply, and the measures taken by the government made it more difficult to liquidate Turkish asset positions.