© Reuters. A woman holds Turkish lira banknotes in this illustration taken on May 30, 2022. REUTERS/Dado Ruvić/Illustration/File Photo
ISTANBUL (Reuters) – The Turkish lira fell as much as 3.3 percent to a record low on Friday, extending losses a day after a major central bank rate hike failed to reassure markets that President Recep Tayyip Erdogan was abandoning his long-standing unorthodox policies.
The lira touched a record low of 25.74 per dollar at 1006 GMT, down about 27.3% this year, and was at 25.6480 at 1039 GMT.
The central bank raised its key interest rate by 650 basis points to 15% on Thursday, far short of expectations for a larger initial tightening that analysts said would have underlined a long-term commitment to fighting inflation.
“The transition appears to be more gradual than we thought,” Goldman Sachs (NYSE:NYSE) said in a note.
The central bank said it would go further “in a timely and gradual manner” after its first meeting under new governor Hafiz Cay Erkan, who was appointed by Erdogan after winning elections last month.
New Finance Minister Mehmet Şimşek, who is highly regarded by the financial markets, reinforced the message of the final turnaround in which he said that “the path towards price stability will be gradual but steady.”
The move marked a change of course after years of monetary easing as the one-week repo rate was cut to 8.5% from 19% in 2021 despite rising inflation.
In a Reuters poll, the average estimate was 21%. Analysts said the smaller move suggested Erkan may have limited scope to aggressively tackle inflation under Erdogan, which has undermined the bank’s independence in recent years.
Reflecting the disappointment in the markets, the lira has fallen around 8.5% since Thursday’s rally.
Forward swap markets were pricing them at 33 to the dollar a year ago compared to about 30 they were quoted before the rate hike.
Goldman said monetary tightening indicates the bank plans to stick to macroprudential measures “at least for the time being,” adding that “it will be difficult to fully float (the lira) without an interest rate anchor.”
The Wall Street bank added that the central bank is likely to eventually raise interest rates to a level “consistent with prices in the deposit market.”
Relieve bloating
After touching a 24-year high above 85% last year due to interest rate cuts urged by Erdogan, inflation fell below 40% in May. Real interest rates are very negative and the central bank’s main interest rate is lower than deposit rates of up to 40%.
A senior Turkish official said a large increase could cause problems for the banking sector, and gradual steps prevent sudden fluctuations. “Moving forward according to the balance between inflation and interest rates, with a focus on real prices is among the priorities now,” the source told Reuters.
Tradeweb data showed that Turkish international bonds held steady with longer-term issues seeing small gains following Thursday’s sharp declines in the wake of the interest rate decision.
However, the cost of insuring state debt exposure through credit default swaps rose for the second consecutive session to stand at 518 basis points, having added nearly 50 basis points since last Friday’s close, data from S&P Global (NYSE: Market Intelligence).
A banking source told Reuters that Erkan will meet with a group of bank executives on Friday after Simsek met them last week and discussed problems in the sector.