Turkish lira plummets to record lows on possible rate cut

ISTANBUL-Reuters

REUTERS Photo

The Turkish lira weakened to as low as 2.42 against the dollar Jan. 29 on expectations that the Turkish Central Bank will cut interest rates at an extraordinary monetary policy committee meeting as early as next week.

In a Reuters poll on Jan. 28, all 15 economists who responded said they expect the Bank to hold an unscheduled meeting after inflation data is released on Feb. 3. They expect it to cut its main interest rate by 50-75 basis points.

The lira, also hit by the Federal Reserve’s upbeat view on the U.S. economy and a signal that it remains on track to raise interest rates this year, weakened from 2.37 late on Jan. 28 and weakened to as low as 2.42, above its record low of 2.41.

“As the dollar-lira broke above the 2.37 resistance level, we think this opens room for a move towards 2.41, especially if the Central Bank eases the liquidity stance or cuts the upper bound of the interest rate corridor as well next week,” Erkin Işık, strategist at TEB-BNP Paribas, said in a note.

The main share index Borsa İstanbul fell 0.39 percent to 89,992.81 points, but outperformed the broader emerging market index, which was down more than 1 percent. The benchmark 10-year government bond yield rose to 7.07 percent from 6.99 percent on Jan. 28.

The Central Bank opened a one-week fixed-rate repo auction yesterday with a volume of 16 billion liras ($6.7 billion), the Bank’s data showed.

Central Bank head Erdem Başçı, who is under pressure from the government to lower rates ahead of the June parliamentary elections, said on Jan. 27 the Central Bank could act as early as Feb. 4 if data due a day earlier shows January inflation slowing by more than 1 percentage point.

“We could hold a meeting to make a quick decision,” he told a news conference called to announce the Bank’s quarterly inflation report.

“If January inflation falls more than one percentage point and core inflation is good, we could even make an assessment on Feb. 4,” he added. The next monetary policy committee meeting is scheduled for Feb. 24.

The Central Bank lowered its main interest rate last week and drew a swift rebuke from government ministers who said the 50-basis point cut was not enough to support economic growth.

The Bank cut its main one-week repo rate to 7.75 percent in response to slowing inflation, but left other rates on hold.