Turkish lira in historic crash of 15% after Erdogan started fire sales

  • Lira has lost 45% vs dollars this year, worst in the world
  • The central bank has cut its key interest rate by 400 basis points since September
  • Governor calls for end to “irrational experiment”
  • Erdogan insists that tighter policies will not lower inflation

ISTANBUL, November 23 (Reuters) – Turkey’s lira fell 15% on Tuesday on its second-worst day ever after President Tayyip Erdogan defended recent sharp interest rate cuts, promising to win his “economic war of independence” despite widespread criticism and prayer. to turn the course.

The lira fell to as low as 13.45 to the dollar, breaking the record for an 11th straight session. It has lost 45% of its value this year, including a decline of almost 26% since the beginning of last week.

Erdogan has put pressure on the central bank to turn to an aggressive relief cycle that aims, he says, to increase exports, investment and jobs – even when inflation rises to close to 20% and currency depreciation accelerates, eating deep into Turks’ incomes. read more

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Many economists called the interest rate cuts ruthless and called for a reversal, while opposition politicians appealed for early elections. Turks told Reuters that the dizzying currency collapse increased their household budgets and plans for the future.

Former deputy governor of the central bank Semih Tumen, who was fired last month in the latest of Erdogan’s rapid leadership overhaul, called for an immediate return to policies that protect the value of the lira.

“This irrational experiment that has no chance of success must be abandoned immediately and we must return to quality policies that protect the value of the Turkish lira and the prosperity of the Turkish people,” he said on Twitter.

Tuesday’s crash was the lira’s worst since the height of a currency crisis in 2018 that led to a sharp recession and after years of low economic growth and double-digit inflation.

Although the lira reduced some losses by 1339 GMT, when it was worth 12.7 against the dollar, the last 11 days of losses have been the worst race since 1999.

The central bank has cut interest rates by a total of 400 basis points since September, leaving real interest rates deeply negative as virtually all other central banks have begun to tighten or are preparing to do so.

The lira has been by far the worst outcome globally this year, mainly due to what some analysts have called a premature economic “experiment” by the president who has ruled Turkey for almost two decades.

Erdogan’s ruling AK Party is slipping in opinion polls ahead of the election, which is scheduled for mid-2023 at the latest, reflecting sharply higher living costs.

“Prices are rising too fast. I do not want to buy certain products because they have become too expensive,” said Kaan Acar, 28, a hotel manager at the Kalkan resort in southern Turkey, adding that he intended to cancel a trip abroad due to to the rising costs.

“The fault lies with President Erdogan, the AKP government, and those who for years closed their eyes and supported them.”

Investors seemed to be fleeing as volatility meters rose to the highest levels since March, when Erdogan abruptly fired the former central bank governor and installed a new governor, such as the president, a critic of high interest rates.

Against the euro, the currency weakened to a new record low of 14.6442 on Tuesday.

The 10-year reference rate on bonds rose above 21% for the first time since the beginning of 2019. Government bonds in dollars suffered sharp falls with many longer issues down 2 cents, Tradeweb data showed.

As the lira plunged, the main stock index (.XU100) rose more than 1% due to sudden cheap valuations. However, bank shares fell, with the bank index down 2.5%.

Reuters graphics


The central bank cut the key interest rate last Thursday by 100 basis points to 15%, well below inflation of almost 20%, and signaled further easing.

On Tuesday, Erdogan received support from his parliamentary ally, nationalist MHP leader Devlet Bahceli, who said that high interest rates limit production and that there was no alternative to a policy that focuses on investment.

“Turkey must get rid of that hump of interest,” Bahceli said in a speech to his party in parliament.

Analysts said there would soon be a need for acute rate hikes, while speculation about a cabinet overhaul involving the more orthodox finance minister, Lutfi Elvan, has also weighed.

Erdogan defended the policy late on Monday, saying that tighter monetary policy would not lower inflation. read more

“I reject policies that will bring our country together, weaken it, condemn our people to unemployment, hunger and poverty,” he said after a cabinet meeting, which led to the lire collapsing late in the day.

Societe Generale said on Monday that the central bank must deliver an “emergency” increase as soon as next month and raise the key interest rate to around 19% by the end of the first quarter of 2022.

Ilan Solot, global marketing strategist at Brown Brothers Harriman, said Erdogan would likely wait for a “breaking point” before turning the corner.

“Right now, the locals seem to be happy to keep the dollar in the local system. If they start moving money elsewhere, to Germany, to Austria, it’s a different story,” Solot said.

“At that time, we are talking capital controls. There are not enough dollar reserves, not enough dollars in the system to handle it. Then we will have a conversation about a real currency crisis,” he added.

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Further reporting by Ali Kucukgocmen in Istanbul, Ece Toksabay in Ankara, Karin Strohecker, Marc Jones and Tommy Wilkes in London; Author by Jonathan Spicer; Edited by Gareth Jones and Susan Fenton

Our standards: Thomson Reuters Trust Principles.

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