Turkish lira plunges 5% after Erdogan stokes firesale

Turkey’s lira crashed 5% to near 12 to the dollar on Tuesday, its eleventh record low in as many days, after President Tayyip Erdogan defended recent sharp rate cuts and vowed to win his “economic war of independence” despite widespread criticism.

The lira weakened as far as 11.9990 versus the US currency and was at 11.8200 at 0744 GMT. It has lost 38% of its value this year, including a 17% meltdown since the beginning of last week.

Erdogan has applied pressure on the central bank to pivot to an aggressive tightening cycle that aims, he says, to boost exports, investment and jobs – even as inflation soars to near 20% and the currency depreciation accelerates, eating deeply into Turks’ earnings.

Former central bank deputy governor Semih Tumen, who was dismissed by Erdogan last month, called for an immediate return to policies which protect the lira’s value.

“This irrational experiment which has no chance of success must be abandoned immediately and we must return to quality policies which protect the Turkish lira’s value and the prosperity of the Turkish people,” he said on Twitter.

The lira is by far the worst performer in emerging markets this year due mostly to what analysts call reckless and premature monetary easing. Against the euro, the currency weakened to a fresh record low of 13.4035.

In the bond market, Turkey’s 10-year benchmark yield rose above 21% for the first time since the start of 2019. As the lira plunged, the main share index jumped 1.5% due to suddenly cheap valuations.

‘Emergency hikes’?

The central bank cut its policy rate last Thursday by 100 basis points to 15%, well-below inflation of nearly 20%, and signalled further easing.

It has slashed rates by a total of 400 points since September in what analysts have called a dangerous policy mistake given deeply negative real yields, and given virtually all other central banks have begun, or preparing to, tighten.

Analysts said emergency rate hikes would be needed soon, while speculation about a cabinet overhaul involving the finance minister, Lutfi Elvan, have also weighed.

Erdogan defended the policy in a news conference late on Monday and said tighter monetary policy would not lower inflation.

“I reject policies that will contract our country, weaken it, condemn our people to unemployment, hunger and poverty,” Erdogan said after a cabinet meeting, prompting a late-day slide in the lira.

Societe Generale said on Monday the central bank would need to deliver an “emergency” hike as soon as next month and lift the policy rate to about 19% by the end of the first quarter of 2022.

“Risks are skewed for more depreciation,” said Guillaume Tresca, senior EM strategist at Generali Insurance Asset Management, adding he expected Turkey’s turmoil to have a limited impact on other emerging market countries and assets.

“We do not see value in Turkish assets yet. The main difference from previous market stress episodes is the limited push-back from authorities. There is a clear will for a weaker FX,” he added in a note. [Reuters]