The Turkish lira is continuing its downward descent against the US dollar and the euro, with the currency pairs trading close to fresh record lows. It has been a roller coaster ride throughout 2021, with the country giving foreign markets a headache on its embrace and then rejection of orthodox monetary policy. Will the lira finish the year even lower, or can it muster up some gains heading into 2022?
On Thursday, the central bank cut its benchmark one-week repo auction rate by 200 basis points to 16% during its October policy meeting. This comes one month after the officials slash rates by 100 basis points.
While market analysts had anticipate a rate cut, they only penciled in a 50-basis-point reduction.
President Recep Tayyip Erdogan holds the unconventional view that high rates spur inflation and that lower rates are necessary to support the economic recovery. But experts warn that Ankara is laying the groundwork for “super hyper inflation” in the coming years.
Phoenix Kalen, an emerging markets strategist at Société Générale, told the Financial Times:
“If you’re looking at any longer timeframe . . . this decision is completely nonsensical. You’re going to spur hyper inflation and dollarisation . . . You’re encouraging speculators to go after the currency. You’re going to hurt corporates, with all the FX denominated debt that they still have. From any medium-term perspective, it is really damaging to the monetary policy framework of the country and the financial stability.”
Meanwhile, Turkey’s foreign exchange reserves increased again, rising to $85.96 billion in the week ending October 15. This represented the eighth straight weekly boost.
Surging inflation could be weighing on consumers as the consumer confidence index fell from 79.7 in September to 76.8 in October. The business confidence reading for October will be released on Monday.
The USD/TRY currency pair advanced 1.15% to 92.69, from an opening of 9.5189, at 15:19 GMT on Friday. The EUR/TRY soared 1.23% to 11.2019, from an opening of 11.0656.