Economic news

Turkish Lira Crashes 8% after Erdogan Stokes Firesale

  • Erdogan says tighter monetary policy will not lower inflation
  • Lira has slumped 38% this year
  • Central bank has slashed policy rate 400 points since Sept

ISTANBUL, Nov 23 (Reuters) - Turkey's lira nose-dived 8% on Tuesday after President Tayyip Erdogan defended recent sharp rate cuts, and vowed to win his "economic war of independence" despite widespread criticism and pleas to reverse course.

The lira crashed to as low as 12.49 against the dollar after hitting records in the last 11 straight sessions. It has lost 40% of its value this year, including a near 20% tumble since the beginning of last week.

Erdogan has applied pressure on the central bank to pivot to an aggressive easing 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.

Buyers appeared to dry up as volatility gauges spiked to the highest levels since March, when Erdogan abruptly sacked the former hawkish central bank chief and installed a like-minded critic of high rates.

"Spreads show there is no liquidity in the market," said one forex dealer, citing Erdogan's comments as the main driver.

The 10-year benchmark bond yield rose above 21% for the first time since the start of 2019. Turkey's sovereign dollar bonds fell more than 1 cent in early trading, Tradeweb data showed.

As the lira plunged, the main share index jumped 1.5% due to suddenly cheap valuations.


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 that virtually all other central banks have begun tightening, or are preparing to do so.

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

Erdogan defended the policy at 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.

Additional reporting by Karin Strohecker and Marc Jones in London; Editing by Sherry Jacob-Phillips, Jonathan Spicer and Gareth Jones

Source: Reuters

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