Turkish lira dips to near record low on rate cut, US concerns | Business and Economy News

The Turkish lira was down in early trading, contributing to a recent decline and nearing an all-time low as relations with the United States calmed down and the new central bank chief signaled that rate hikes would hurt the economy.

The currency, which is among the worst in emerging markets this year, hit 8.425 against the US dollar on Monday, nearing its low watermark of 2021 and its high of 8.58 in early November.

“The negativity of the market is intense. Unfortunately, the risk of overshooting is increased, ”said Robin Brooks, chief economist at the Institute of International Finance.

The lira lost 3.5 percent in the past three trading days when it became clear that US President Joe Biden would officially recognize the 1915 murders and deportation of Armenians in the Ottoman Empire as genocide.

Turkey, a US NATO ally, sharply criticized the White House decision, announced on Saturday, saying it had undermined trust and friendship.

Turkish assets are particularly sensitive to strains on Washington relations due to the aftermath of US sanctions and economic threats, including a dispute with then-President Donald Trump in 2018 that sparked a lira crisis and recession.

President Recep Tayyip Erdogan’s spokesman and advisor Ibrahim Kalin told Reuters that Washington should act responsibly because it is of no interest to “artificially undermine ongoing relationships for close political agendas.”

“Everything we do with the United States will be under the spell of this very unfortunate statement,” he said in an interview on Sunday.

Turkey’s central bank governor Sahap Kavcioglu, who was appointed a month ago, said late Friday that any rate hike would be bad news for the real economy for now, even though it would keep monetary policy tight.

“Who is satisfied with high interest rates?” he said in his first television interview as a bank manager.

Rate cuts?

The lira has declined for the past six consecutive trading days.

It fell by as much as 15 percent after Erdogan last month dismissed Naci Agbal, a respected political hawk, as governor of the central bank and appointed Kavcioglu, who – like Erdogan – is a critic of tight monetary policy and has taken the unorthodox view that it is Causes inflation.

Agbal had raised the central bank’s key interest rate to 19 percent to contain inflation, which has risen over 16 percent and is expected to reach 18 percent. Many foreign investors who bought Turkish assets under Agbal sold them when he was fired.

Analysts anticipate the central bank will begin rate cuts in the middle of the year, and some predict Kavcioglu could revert to costly policies put in place prior to Agbal’s appointment in November to keep foreign exchange (FX) reserves (FX) in support of the lira for sale.

The political opposition has urged Erdogan and his ruling AK party to make around USD 128 billion in foreign currency sales in 2019 and 2020, made by state banks and backed by central bank swaps, which depleted foreign currency reserves.

In the interview, Kavcioglu defended sales in the face of the so-called “attacks” that began with the 2018 crisis.

The depreciation of the lira could have gotten out of hand and borrowing costs would have increased if authorities hadn’t intervened last year, Kavcioglu said.

“You have to meet last year’s foreign exchange demand,” said Kavcioglu. “If you don’t do this, Turkey will have to face the consequences.” He cited corporate bankruptcies during a financial crisis 20 years ago as examples of how bad things could get.

Diminishing reserves

Opposition parties blamed Berat Albayrak, Erdogan’s son-in-law, who served as finance and finance minister for more than two years, until his resignation in November, responsible for the decline in reserves.

Kavcioglu said the reserve policy has been in place since 2017, when a protocol signed between the central bank and the Treasury Department allowed such unannounced interventions in foreign currency.

Turkey’s total gross reserves, including gold and money held by the central bank for commercial lenders, have fallen more than 15 percent since early 2020 to $ 89.3 billion in April. International net reserves fell more than 75 percent to $ 9.9 billion, while money borrowed from banks through short-term swaps hit tens of billions of dollars.

According to calculations by the Bloomberg news agency, net reserves would drop below zero if the swaps were stripped.

Kavcioglu “seemed pretty confident about the quality of the reserves and said they were only moved from assets to liabilities,” said Ozlem Derici Sengul, the founding partner of Spinn Consulting. “However, losing assets and holding liabilities means the system remains quite fragile in a situation like banking where households and businesses need their foreign currency deposits,” she said.

Erdogan fired three central bank governors in two years, which hurts the financial credibility of foreign investors.

Biden’s move on Saturday fulfilled a Democrat’s 2020 election promise to Armenian-American citizens, but risks pushing Turkey further into Russian orbit.