A record collapse in the lira is proving to be a headache for Turkey’s central bank.
With the Turkish currency at its lowest on record against the dollar, monetary policy may have to make an abrupt turn towards tightening this month in a bid to protect the lira, according to analysts.
Ahead of the central bank’s latest policy meeting on Thursday, Piotr Matys at Rabobank expects policymakers to hike Turkey’s one-week repo rate by 0.25 percentage points to 7.75 per cent this month – drawing a curtain on an easing cycle that kicked off in back February.
“Allowing the currency to weaken even further may undermine confidence among households and corporates, which would have negative consequences for the economy,” said Mr Matys.
The central bank’s meeting comes in the same week that Ankara’s government has convened its top economic officials twice in five days to address the lira’s collapse, according to Turkey’s Hurriyet newspaper.
Turkish prime minister Binali Yildrim said on Tuesday that there were no fresh causes for concern, citing the lira’s recent volatility as a result of “global developments”.
Pressure on the lira has accelerated in the wake of Donald Trump’s election as US president, with the Republican candidate’s promise of high spending supporting the dollar and putting a 100 per cent market probability of an interest rate rise from the Federal Reserve next month.
The lira has lost 17 per cent of its value against the greenback this year, battered by the prospect of tighter US monetary policy, jitters over Turkey’s political stability and persistent security concerns.
The lira is trading at a record low of TRY3.3597 today.
Mr Trump’s election could now prove to be “the final straw” in a bearish “cocktail” of forces, said Mr Matys:
The outcome of the US presidential election was a major blow as it squeezed the dollar significantly higher against the lira than we anticipated. The markets adopted a relatively bullish view on the US dollar based on the assumption that President-elect Donald Trump will deliver his pre-election pledges of substantial fiscal stimulus.
Rising market concerns about political developments in Turkey since the failed coup and a sudden repricing of Fed’s rate hikes proved to be a bullish cocktail for the dollar.
Turkey’s central bank, often the subject of political pressure from president Recep Tayyip Erdogan who has backed looser monetary policy, kept rates on hold last month, citing the weaker exchange rate’s possible side effects for inflation.
It was the first time policymakers decided to make no change to the overnight lending rate which has been trimmed six consecutive times since March in a bid to support economic growth.
Kubilay Ozturk, chief Turkey economist at Deutsche Bank, is now placing a 55 per cent probability on a November rate rise “supported by a formal signal by policymakers to do more if necessary”.
Absence of a strong message in the November MPC meeting could lead to further deterioration in market sentiment with repercussions on the pricing behavior, inflation and growth in the coming months. More importantly, residents are seemingly less active in the FX market of late.