Turkish Lira hits new lows as economy minister rules out rate hike

ANKARA - Agence France-Presse

Although the Istanbul stock exchange was up a narrow 0.25 percent, the lira fell to 2.2436 to the dollar and 3.0419 to euro in midday trading. REUTERS photo

Turkey's currency sank to new record lows on Jan. 20, pummelled by a continuing political crisis shaking the government of Prime Minister Recep Tayyip Erdoğan.

The country's economy minister dismissed any likelihood of the central bank raising interest rates to prop up the lira at its monthly policy meeting on Jan. 21.

The lira fell to 2.2436 to the dollar and 3.0419 to euro in midday trading, although the Istanbul stock exchange (BIST) was up a narrow 0.25 percent to 65,798.63 points.

The central bank, which is statutorily independent, has been under pressure from Erdoğan's government not to raise interest rates to sustain growth and keep inflation in check.

Instead, it has been using its foreign currency reserves to prop up the currency, selling around $17.6 billion last year.

"I believe that the central bank should not hike interest rates because it would be an inconclusive step and put a permanent burden on our economy," freshly appointed Economy Minister Nihat Zeybekci was quoted as saying.

Zeybekçi said Turkey's economy was stronger than the economies of many other countries in the world, adding: "We don't see the weakening Turkish lira as an economic consequence but a psychological and political one."

He said "as long as Turkey has sound political and economic stability like today, I believe the weakening lira... will affect foreign investors positively," in remarks carried by the Anatolia news agency.

The currency is under pressure not only from the political crisis but also the level of its external liabilities which make it vulnerable in particular to the U.S. Federal Reserve's move to trim its multi-billion dollar bond-buying programme.

Economists have highlighted Turkey's yawning current account deficit, currently at over 7.0 percent of gross domestic product, as a key concern.

Finansbank said in a market commentary that it did not believe the bank would raise rates, although noting that a considerable number of economists now expect an increase in the overnight lending rate of 50-100 basis points, or from half to a full percentage point.

"However, such a timid step, unless it is coupled with very forceful rhetoric, would fall way short of providing yield support for TRY (the lira) and it might even foster the impression that (the central bank) is out of touch with market concerns," it said.

The government has sought to play down the impact of the crisis on the once fast-growing emerging economy as only "temporary."

It has stuck to its forecast that growth will pick up from an expected 3.6 percent in 2013 to 4.0 percent this year. Last week however, Deputy Prime Minister Ali Babacan said that inflation might come in higher than expected because of the lira's depreciation. Turkey's inflation was registered at 7.4 percent last year and the government had been predicting 5.3 percent for 2014.

Economists have also started revising down their growth projections for 2014. Istanbul-based Finansbank meanwhile said it expected growth to slow to 3.2 percent this year, down from its December forecast of 3.9 percent.