The Turkish lira is down nearly 9% after Erdogan started fire sales

  • The lira has fallen 40% this year
  • Erdogan says a tighter monetary policy will not lower inflation
  • The central bank has lowered the key interest rate by 400 basis points since September
  • ex-cen banks call for stopping “irrational experiments” with politics

ISTANBUL, November 23 (Reuters) – Turkey’s lira fell nearly 9% on Tuesday after President Tayyip Erdogan defended the latest sharp interest rate cuts and promised to win his “economic war of independence” despite widespread criticism and prayers to turn the tide.

The lira fell to as low as 12.49 against the dollar, resulting in record highs for an 11th session in a row. It has lost 40% of its value this year, including a drop of almost 20% since the beginning of last week. It traded at 12.32 at 1048 GMT.

Erdogan has put pressure on the central bank to turn to an aggressive easing cycle aimed at increasing exports, investment and jobs – even as inflation rises to close to 20% and currency depreciation accelerates and erodes deep Turkish earnings.

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Former Deputy Governor of Central Banks Semih Tumen, who was sacked by Erdogan last month, called for an immediate return to policies that protect the value of the lira.

“This irrational experiment, which 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 fall was the lira’s biggest drop since the former central bank governor was sacked in March, and its 11-day loss was its worst run since November 1999. The lira has been by far the worst performer in emerging markets this year, mainly due to analysts. call ruthless and premature monetary easing.

Against the euro, the currency weakened to a fresh record low of 13.8815 on Tuesday.

The fall in the lire comes after a drop in support for Erdogan’s ruling AK Party in opinion polls and the opposition’s calls for early elections ahead of those planned for 2023. It has also heightened Turks’ concern over the sharply rising cost of living.

“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 southern Turkish Kalkan resort, adding that he was considering canceling a trip abroad due to to the rising costs.

“The fault lies with President Erdogan, the AKP government and those who for years turned a blind eye to and supported them.”

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

The 10-year benchmark bond yield rose above 21% for the first time since early 2019. Turkey’s government bonds in dollars fell more than 1 cent in early trading, Tradeweb data showed.

When the lira fell, the main stock index became (.XU100) increased 1% due to sudden cheap ratings. However, bank shares fell and the bank index fell 1.3 per cent.

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‘EMERGENCY TRAVEL’?

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

It has lowered interest rates by a total of 400 basis points since September, in what analysts have called a dangerous political mistake given deep-negative real interest rates, and given that virtually all other central banks have begun to tighten or are preparing to do so .

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

“Turkey needs to get rid of the humpbacks of interest rates,” Bahceli said in a speech to his party in parliament.

Analysts said there would soon be a need for emergency rate hikes, while speculation about a cabinet review involving Finance Minister Lutfi Elvan has also weighed.

Erdogan defended the policy late Monday, saying a tighter monetary policy would not lower inflation. Read more

“I reject policies that will contract our country, weaken it, condemn our people to unemployment, hunger and poverty,” he said after a government meeting, leading to a drop in the lira late in the day.

Societe Generale said on Monday that the central bank would have to 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.

“Risks are skewed for more depreciation,” said Guillaume Tresca, senior EM strategist at Generali Insurance Asset Management, adding that he expected Turkey’s turmoil to have a limited impact on other emerging market countries and assets.

“We do not see value in Turkish assets yet. The biggest difference from previous market stress episodes is the limited push-back from the authorities. There is a clear will for a weaker currency,” he added in a note.

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Additional Reporting Ali Kucukgocmen, Ece Toksabay; Karin Strohecker and Marc Jones in London; Edited by Jonathan Spicer, Gareth Jones and Susan Fenton

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