ISTANBUL (Businesshala) – The Turkish lira continued its dive into unconventional territory on Thursday, with the dollar touching a new low of 9.975 after a spurt in US inflation raised concerns over an already battered currency after the central bank’s unconventional rate cut .
The lira was up 1.2% and near the psychological range of 10 against the US currency. It has lost two-thirds of its value in five years, eating up double-digit inflation along with the income of Turks.
At 1156 GMT, one dollar was worth 9.9145 Turkish lira. The Turkish currency – again the worst performer among emerging markets this year – was also close to a record intraday low against the euro at 11.4386.
Higher-than-expected US inflation data boosted the dollar as investors weighed earlier potential policy by the Federal Reserve. Rising US rates draw money from emerging economies with high foreign debt, like Turkey.
The lira has lost 25% of its value mainly due to concerns over the credibility of monetary policy as President Tayyip Erdogan insisted on lower interest rates to boost growth despite inflation running close to 20%.
Since September, the central bank has reduced its policy rate by a total of 300 basis points to 16%, arguing that inflationary pressures are temporary. Analysts expect further easing despite the already negative real rate.
TD Securities analyst Cristian Maggio said “Turkey is increasingly less attractive” to foreign investors.
“If rates are cut further, the real yield could go up to negative 500 or 600 basis points. And historically, any level that is so wrong with the rest of the market does not bring good things for Turkey,” he said.
Deutsche Bank said the central bank’s thrust on core inflation and the current account suggest that the lira will cut rates by 100 basis points in both November and December, despite depreciation and a jump in commodity prices.
“We expect headline inflation to end at 19.5% … and remain above 20%,” Deutsche Bank said.
While foreign holdings of Turkish debt have fallen to 5% from 20% five years ago, local individuals and companies hold near record levels of hard currencies.
Data shows $233 billion in local hard currency holdings last week, down slightly from September when the rate cuts began.
A trader at a local bank said the Turks have become more sensitive to rising prices and less sensitive to interest rates. “We expect locals to sell dollars as the depreciation continues,” the trader said.
Inflation has been in double digits for most of the past five years, with food prices rising by nearly 30% last month compared to a year ago. Overall consumer price inflation last month stood at 19.9%.
Attila Yesilada, an economist at Istanbul Analytics, said inflation is unlikely to stay below 25% next year if the central bank continues to cut rates, lower the lira and raise import costs.
In a change in guidance, the bank said last month the current account deficit was the country’s main problem, and bridging the shortfall was important to tackle price stability and support the lira.
Turkey’s current account recorded a surplus of $1.652 billion in September, its second straight month in Kala, with export growth and some improvement in tourism revenues.