Turkey in ‘Losing Battle’ Over Lira After Surprise Rate Cut
Turkey lowered interest rates more than forecast by most economists, forcing state banks to defend the lira to keep it from breaching a key threshold against the dollar.
Government-owned lenders sold at least $600 million to support the Turkish currency after the rate decision, according to two traders with knowledge of the matter. The Monetary Policy Committee on Wednesday reduced its benchmark for an eighth time in less than a year, lowering it to 8.75% from 9.75%. Only two of 28 economists in a Bloomberg poll correctly predicted the move, with the rest seeing a smaller cut or a hold.
The central bank has looked past the lira’s steep depreciation in 2020, focusing on spurring credit to mitigate the economic fallout from the coronavirus outbreak. The lira has weakened nearly 15% against the U.S. currency since the beginning of the year and is edging closer to the psychologically important 7-per-dollar mark. It briefly breached that level and slipped as much as 0.3% after the rate announcement, before paring losses. It traded at 6.9779 per dollar as of 8:40 a.m. in Istanbul on Thursday.
“The Turkish central bank has been fighting like crazy to keep the dollar-lira pair below 7, which often seems like a losing battle,” said Brad Bechtel, global head of foreign exchange at Jefferies LLC in New York. “They continue to fight but the market continues to push against them and it feels only a matter of time before they are forced to capitulate.”
The easing cycle is leaving the lira exposed to a global selloff, with Turkey’s inflation-adjusted rates now among the lowest in the world. Undaunted by the currency’s slide, Governor Murat Uysal is pushing real borrowing costs further below zero after last month’s emergency cut of a full percentage point. Meanwhile, the country’s international reserves are running low because of state lenders’ interventions to prop up the lira.
Turkey’s state banks don’t comment on interventions in the foreign-exchange market. In January, Uysal said they have been carrying out transactions in line with regulatory limits and may continue to be active in the currency market.
The MPC said in its statement that risks to its year-end inflation forecasts are “on the downside” after declines in commodity prices and despite the lira’s depreciation.
The rate cut reflected the central bank’s “aim to support growth as much as possible,” Goldman Sachs Group Inc. economists Murat Unur and Clemens Grafe said in a report. “We see risks of emergency hikes to fend off further lira depreciation.”
|What Our Economists Say...|
|“The easing momentum of Turkey’s central bank continues unabated. Further rate cuts are ahead, although their size will probably be smaller than today.”|
-- Ziad Daoud
- Turkish inflation in March slowed for the first time since October, reaching an annual 11.9%, as the drop in oil prices offset some of the increases that a depreciating lira would have caused.
- Declines in commodity prices and domestic demand amid the global pandemic are putting downward pressure on inflation, Uysal said on Sunday. The central bank may update its year-end inflation projection -- currently at 8.2% -- when it issues its next quarterly report on April 30.
- Economic activity has suffered due to the measures taken to check the contagion. Exports dropped almost 18% in March from a year earlier and a gauge of confidence among Turkish manufacturers fell by the most since the 2008 global financial crisis.
- The weighted-average cost of central bank funding is already below the benchmark at around 9%.
- The central bank’s net reserves -- which strip out liabilities including local lenders’ reserve requirements -- fell to $26.3 billion in the week through April 10. Of that, $25.9 billion was borrowed through short-term swaps, the bulk of which had a maturity of one month or less, according to the latest data through the end of February.
“Yet another substantial rate cut is a clear indication that the priority is to support the economy that faces the prospect of a recession,” said Piotr Matys, a strategist at Rabobank in London. “But it also implies that the lira is even less attractive, which means that the central bank may have to spend even more on FX interventions.”
©2020 Bloomberg L.P.