Turkey's lira sinks to record low after unconvincing rate hike
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[June 23, 2023] ISTANBUL
(Reuters) -Turkey's lira weakened as much as 3.3% to a record low on
Friday, extending losses a day after the central bank's large rate hike
failed to assure markets that President Tayyip Erdogan was abandoning
his long-held unorthodox policies.
The lira touched a record low of 25.74 against the dollar at 1006 GMT,
down some 27.3% this year, and was at 25.6480 at 1039 GMT.
The central bank raised its key rate by a hefty 650 basis points to 15%
on Thursday, falling well short of expectations of a larger initial
tightening that analysts said would have underlined a longer-term
commitment to battle inflation.
"The transition appears to be more gradual than we had thought," Goldman
Sachs said in a note.
The central bank said it would go further "in a timely and gradual
manner" after its first meeting under new Governor Hafize Gaye Erkan,
whom Erdogan appointed after his election victory last month.
New Finance Minister Mehmet Simsek, who is highly regarded by financial
markets reinforced the U-turn message saying, "the path towards price
stability is going to be gradual but steadfast."
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The move marked a change in course after years of monetary easing in
which the one-week repo rate had been cut to 8.5% from 19% in 2021
despite soaring inflation.
In a Reuters poll, the median estimate was for a hike to 21%. Analysts
said the smaller move suggested Erkan might have limited room to
aggressively tackle inflation under Erdogan, who has eroded the bank's
independence in recent years.
Reflecting the disappointment in the markets, the lira has declined some
8.5% since Thursday's hike.
Forward swap markets were pricing it at 33 to the dollar in a year's
time compared to around 30 that was priced in before the rate hike.
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Woman holds Turkish Lira banknotes in
this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File
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Goldman said the monetary tightening suggests the bank plans to
stick with macro prudential measures "at least for now", adding that
"it will be difficult to fully float the (lira) without having an
interest rate anchor."
The central bank will likely eventually lift rates to a level
"consistent with the pricing in the deposit market," the Wall Street
bank added.
INFLATION EASING
After touching a 24-year high above 85% last year due to the rate
cuts urged by Erdogan, inflation dropped to just below 40% in May.
Real rates are deeply negative and the central bank's key rate also
falls short of deposit rates that reach up to 40%.
A senior Turkish official said a larger hike could have caused
trouble for the banking sector, and gradual steps prevent sudden
volatility. "Moving ahead according the balance between inflation
and interest rates with an eye on real rates is among the priorities
now," the person told Reuters.
Turkey's international bonds stabilised with the longer-dated issues
seeing small gains following sharp declines on Thursday in the wake
of the rate decision, Tradeweb data showed.
However, the cost of insuring exposure to the country's debt through
credit default swaps rose for a second straight session to stand at
518 bps, having added nearly 50 bps since last Friday's close, data
from S&P Global Market Intelligence showed.
Erkan will meet with a group of bank executives on Friday, a banking
source told Reuters, after Simsek met with them last week and
discussed the problems in the sector.
(Reporting by Can Sezer, Huseyin Hayatsever, Orhan Coskun, Nevzat
Devranoglu, Karin Strohecker;Writing by Daren Butler and Ali
Kucukgocmen;Editing by Jonathan Spicer and Conor Humphries)
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