Turkish lira slumps to new low after interest rate cut – Reuters

ISTANBUL, Dec 16 (Reuters) – The Turkish lira plunged as much as 5.6% to a record low against the dollar on Thursday after the central bank slashed its policy rate in line with an unorthodox economic programme set out by President Tayyip Erdogan.

The lira touched a low of 15.689 after the move, before trimming losses to 15.5 by 1151 GMT. The dollar has more than doubled in value against the lira this year, rattling Turkey’s big emerging market economy. read more

The central bank’s 100 basis point rate cut, in line with the forecast in a Reuters poll, brought its cumulative easing since September to 500 points, making the local currency even less attractive to investors. read more

The bank signalled it would pause the easing cycle to monitor its effects in the next three months. read more

“The central bank’s tolerance for lira pain certainly appears much higher this go around with Erdogan now more or less fully in charge of rates policy,” said Dennis Shen, director of the sovereign and public sector at Scope Ratings.

Erdogan’s new economic plan prioritises exports and lending, even though economists and opposition lawmakers have widely criticised the policy as reckless. With inflation soaring above 21%, Turks’ budgets are straining and anxieties are building.

The central bank has intervened four times in the currency market in the last two weeks, selling dollars to slow the lira sell-off and eating into its already depleted foreign reserves.

Market watchers forecast more pain for the lira after the latest cut.

“It is a bold move that will certainly cost Turkey a lot of money, and headache. The kneejerk reaction is a heavy selloff in the lira. I expect the dollar-try to end the year within the 17-19 band,” said Ipek Ozkardeskaya, Geneva, senior analyst at Swissquote Bank.

EYES ON MINIMUM WAGE

According to the central bank, which targets 5% inflation, the price pressure is temporary and necessary to expand economic growth and balance the current account.

But given the lira’s crash, economists predict inflation will jump to near 30% next year due largely to soaring import prices.

A commission met at the labour ministry to discuss the monthly minimum wage, currently at 2,826 lira net, for 2022. Erdogan was set to announce its new level at 1200 GMT, officials said.

Its dollar value has tumbled to $185 at Thursday’s low, from $380 at the start of the year.

Erdogan has overhauled the central bank’s leadership this year, bringing in like-minded officials to replace orthodox policymakers, leaving its credibility in tatters, analysts say.

The lira was also hit by the U.S. Federal Reserve’s hawkish decision on Wednesday to end its bond-buying stimulus in March, and project up to three U.S. interest rate increases next year to tackle heated inflation. read more

Additional reporting by Ece Toksabay and Orhan Coskun in Ankara, Karin Strohecker and Marc Jones in London; Writing by Daren Butler; Editing by Rashmi Aich, Jonathan Spicer and Angus MacSwan

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