Turkey central bank intervenes again to shore up embattled lira

For the second time this week, Turkey’s central bank dipped into its precious foreign exchange reserves and sold dollars to prop up the lira.

An electronic board displays currency exchange rate information inside the Grand Bazaar in Istanbul, Turkey, on Monday, August 16, 2021. The lira and other Turkish assets gained this week, buoyed by an improved outlook for tourism and the rollout of vaccines. [Moe Zoyari/Bloomberg]

Turkey’s lira has edged near to its record low, prompting the country’s central bank to intervene for a second time this week in foreign exchange markets and sell dollars to shore up the embattled currency.

The exchange rate intervention happened on Friday after ratings agency Fitch revised Turkey’s outlook to “negative” from “stable” over risks created by recent interest rate cuts.

Economists have widely criticised President Recep Tayyip Erdogan’s aggressive rate-cutting policy as reckless, and have warned that the central bank cannot properly defend the currency given its depleted reserves.

The lira weakened as far as 13.89 against the United States dollar before firming as far as 13.37 as the central bank intervened. At 10:39 GMT it stood at 13.65 to the dollar.

The lira has lost some 45 percent of its value against the US dollar this year.

The currency touched a record 14 on Tuesday, a dramatic descent from February when half as many liras were needed to buy one dollar.

The central bank began its interventions the next day and the currency has since approached 13.9 three times before abruptly rallying, suggesting authorities are unwilling to let it blow through 14.

“The impact of the intervention is rather small because the markets know that the reserves are melting,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.

“High inflation calls for rate adjustment. Selling the reserves weakens the central bank’s hand, and should have an increasingly limited impact on the currency moving forward.”

Data on Friday showed annual inflation jumped more than expected in November to a three-year high of 21.31 percent, further exposing the risks of recent aggressive rate cuts.

Erdogan has repeatedly defended the low-rate economic policy over the last two weeks. Government, regulators and banks association have all rallied around what the Turkish president calls a new economic model.

Fitch described the central bank’s easing – which started in September even when inflation was accelerating – as premature and said it caused deterioration in domestic confidence reflected in a sharp depreciation of the currency.

“Maintaining a deeply negative real policy rate could further undermine domestic confidence, increasing risks for financial stability, for example, if depositor confidence is shaken, and potentially jeopardise the until now resilient access of banks and corporates to external financing,” Fitch said in its ratings report.

Since September, the central bank cut the policy rate by four percentage points to 15 percent. In investor calls on Thursday, the bank’s governor signalled that policy easing would likely pause in January after one more rate cut this month.

Source: Reuters