Turkey’s currency crisis deepens after Erdogan’s latest rate cut

Turkey’s crisis accelerated on Friday as the lira plunged 6% to a new all-time low, gripped by concerns over an inflationary spiral brought on by President Tayyip Erdogan’s unorthodox plan to slash interest rates in the face of soaring prices.

The lira had tumbled as far as 16.69 versus the dollar by 1004 GMT. It has lost 56% of its value this year – including 40% in the last 30 days alone – deeply unsettling the major emerging market economy.

Erdogan’s decision to push through 500 basis points of monetary easing since September, including another big cut on Thursday, has sent inflation soaring above 21%. It is likely to blow through 30% next year due to ballooning import prices and an emergency hike in the minimum wage, economists say.

“With Erdogan seemingly becoming more entrenched in his anti-interest rate stance, the longer the currency crisis lasts, Turkey could be beyond the point of no return,” said Patrick Curran at Tellimer, describing the lira as totally disconnected from fundamentals.

“We are still not ready to catch the falling knife,” he said of the possibility of re-investing in Turkish assets. “As long as Erdogan is at the helm there is nothing to prevent the lira from continuing to depreciate.”

The knock-on effects have been fast and painful as Turks watch their savings and earnings dissolve.

Erdogan announced a 50% hike in the minimum wage, to 4,250 lira ($275) per month next year. But that is expected to boost overall consumer price inflation by 3.5 to 10 percentage points.

The hike affects some six million workers but, given the sharp lira depreciation, the new minimum wage is still lower than the equivalent $380 a year earlier.

“We believe that the current mix of policies is essentially unsustainable,” Maxim Rybnikov, director sovereign ratings for the EMEA region at S&P Global Ratings, said in a webcast.

Policy framework reassessment?

The central bank’s 100 basis point rate cut on Thursday sent Turkey’s real rate deeper into negative territory.

The bank signalled it would pause the easing cycle to monitor its effects in the next three months, when “all aspects of the policy framework will be reassessed in order to create a foundation for a sustainable price stability,” it said.

“Possibly that means other interest rate channels could be under consideration,” Rybnikov said. The central bank has in the past used an interest rate corridor in setting rates.

If the rate-cutting cycle were to continue the possibility of capital controls could be on the rise, Rybnikov added. “This is not our base line…we believe that as a policy measure, they would be used as a measure of last resort.”

Though Erdogan has rebuffed pleas even from within his government to reverse course, traders predict it will have to come soon. The 10-year benchmark yield has nearly doubled to 22.5% from around 12% at the start of the year.

Wall Street bank JPMorgan predicted a massive 12 percentage point rise in interest rates next year, far more than any of Turkey’s peers.

The central bank has been under pressure from Erdogan to slash rates to boost economic growth, lending and exports under his new economic plan. Economists and opposition lawmakers have widely criticised the policy as reckless.

The central bank has intervened four times in the currency market in the last two weeks, selling dollars to slow the lira slide and eating into its already depleted foreign reserves.

The lira has also plunged 51% against the euro and 54% against sterling this year. [Reuters]