Turkey’s lira fell to a record low, breaching 14 to the dollar, as investors braced themselves for President Recep Tayyip Erdogan pushing on with another interest rate cut later this week despite intense inflation.
The currency, which has fallen about 40 per cent since the central bank embarked on a rate-cutting cycle under Erdogan’s orders in September, on Monday crossed a threshold that authorities had previously appeared reluctant to tolerate.
The lira tumbled as much as 5 per cent to 14.62 against the dollar in London dealings on Monday, before recovering to about TL14. The currency started 2021 at roughly TL7.
The renewed selling came after Erdogan’s increasingly unorthodox approach to running Turkey’s $795bn economy led the rating agency S&P to downgrade its outlook on the country to negative at the end of last week, meaning that its rating of Turkish sovereign debt could be cut deeper into junk territory.
“The negative outlook reflects what we view to be rising risks to Turkey’s externally leveraged economy over the next 12 months from extreme currency volatility and rising inflation, amid mixed policy signals,” S&P said.
Erdogan, a staunch opponent of high interest rates, has declared in recent weeks that he is seeking to implement a new economic model for his nation of 83m people.
By cutting rates, he argues, the country will benefit from a competitive currency that will boost exports, attract foreign direct investment and create employment.
Economists warn that it will come at the cost of exacerbating inflation that was already growing at an annual rate of 21 per cent last month, according to official data, and hitting living standards.
It also risks financial instability in a country that is heavily reliant on foreign financing to keep its economy afloat.
The US investment bank Goldman Sachs said the need to raise — rather than cut — interest rates was “even more acute” this month as it argued that the current approach was “not sustainable”.
“Nevertheless, the authorities appear committed to maintaining a low rate policy,” it added.
The consensus expectation among analysts is that the central bank will cut its benchmark lending rate by 1 percentage point to 14 per cent on Thursday.
Still, the central bank’s decision this month to resume a policy of seeking to defend the lira has led some analysts to question whether Erdogan may be reaching the limits of his tolerance to currency weakness — and whether he may instead allow a pause in the rate-cutting cycle.
On Monday, Turkey’s central bank announced it had intervened in the currency market for the fourth time so far in December. The bank had sold an estimated $2bn to $3bn on the three earlier occasions, according to Barclays. The UK-based bank said there were “large uncertainties” around this week’s rates decision and those in the months ahead.
Yet one senior Turkish official offered a signal that Ankara was committed to ploughing ahead with its contentious approach.
The new finance minister, Nureddin Nebati, told business representatives in a closed-door meeting last week that there would be “no turning back” from the policy of rate cuts, according to an article published on Sunday by the columnist Abdulkadir Selvi, who is seen as close to the government.
Nebati, who was appointed by Erdogan two weeks ago after his predecessor resigned, reportedly said that the authorities were not willing to allow Turkey to enter an “interest rate spiral”.