Turkish lira drops to record low as central bank defends approach

Turkey’s central bank governor insisted on Wednesday that the bank had responded robustly to a slide in the lira even as the currency sunk to another record low.

Murat Uysal acknowledged that the lira, which has fallen about 28 per cent against the dollar this year, had suffered “volatility” due to geopolitical tensions and other factors. On Wednesday, it fell as much as 1.6 per cent to set its weakest level yet at 8.3211 to the dollar.

But Mr Uysal argued that the bank had implemented “strong tightening” in a monetary policy meeting last week that disappointed both Turkish and foreign investors, after the bank decided to raise the cost of borrowing through an obscure emergency facility rather than the main interest rate.

“Don’t understand this as the central bank not reacting — on the contrary, the central bank has reacted,” Mr Uysal told a press conference in Istanbul.

Rising tensions between Turkey and its traditional western allies have combined with monetary policy concerns to add to the selling pressure in recent days, prompting concerns of a full-blown currency crisis akin to the one that struck the country in 2018. Investors and analysts have warned that the central bank may need to announce an emergency rate rise if the currency continues to spiral lower.

The governor declined to comment on the prospect of an emergency rate-setting meeting but indicated that the average cost of funding provided by the central bank to the Turkish financial system — which stood at 12.87 per cent on Tuesday — would continue to rise in the coming weeks, supporting the lira.

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He said there was still “some room” to tighten monetary policy further, demonstrated by the interest rate on the late liquidity window, which now stands at 14.75 per cent after last week’s increase.

“Whatever is needed will be done, both in terms of preserving financial stability and price stability. This is very clear,” he said.

Investors have raised concerns about economic policy under the stewardship of President Recep Tayyip Erdogan, a staunch opponent of high interest rates, and his influence over nominally independent institutions such as the central bank. Mr Uysal insisted the bank was “free to use our tools”.

He added: “We are going through extraordinary times . . . This may lead people to challenge the credibility or the confidence in the central bank.”

But the bank will “continue our strong monetary policy stance and we will communicate more, and I think that will boost confidence in our institutions”, he said.

However, Mr Uysal also conceded that inflation would be much higher at the end of 2020 than the previous year-end forecast announced just three months earlier. The forecast was increased by 3.2 percentage points to 12.1 per cent.

Responding to the revision, Hakan Kara, who served as the central bank’s chief economist until being removed from his post last year, wrote on Twitter: “If you cannot target inflation, inflate the target.”

Mr Uysal insisted that the bank was not targeting a specific rate for the Turkish lira, despite a consensus among economists and analysts that it had, through Turkey’s state banks, staged a multibillion-dollar currency intervention over the past 18 months that has taken a heavy toll on the country’s foreign currency reserves.

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The governor appeared to confirm reports from traders and analysts that state banks had continued to intervene to support the currency in recent weeks. “We can still see some state bank activity, though not as high as before,” he said.

He said Turkey’s reserves, which rating agency Moody’s said last month were at a 20-year low, were “more than adequate to meet our short-term liabilities at this stage”.


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