Turkey’s lira hits record low on rate cut expectations

ISTANBUL - Reuters

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The Turkish lira hit a record low against a strong dollar on Jan. 30, weighed down by expectations that the Central Bank could hold an extraordinary meeting next week to cut interest rates.

The lira weakened as far as 2.4470 per dollar, from 2.4036 late on Jan. 29, before steadying to 2.4345 by the afternoon.

The currency pared some of its losses after the Central Bank said recent market movements were not consistent with the cautious stance the bank has taken over interest rate cuts.

Analysts said the bank’s statement signaled that the expected rate cut may not come as early as next week and it may not be as deep as the market had expected.

“We read the statement as the Central Bank does not find the recent volatility in exchange rates compliant with its planned rate cuts and wants the market know that they will not do anything that will threaten the permanence of disinflation,” analysts at Deniz Invest said in a research note.

Deniz Invest added that it no longer expected the bank to hold an extraordinary meeting next week while some bankers said they still believed the bank could convene but trim the rates less than previously expected.

The bank has already lowered interest rates earlier this month by 50 basis points. But it faced criticism from key government figures for not cutting more sharply before a general election in June, deepening investors’ worries about government interference in the bank’s monetary policy.

President Recep Tayyip Erdoğan, known for his advocacy of lower interest rates, kept up his criticism of interest rate policy on Jan. 30. “The rates are almost twice the expected inflation. This is a deviation that should be fixed,” he said.

The Central Bank has kept a tight monetary policy for most of 2014 due to stubbornly high inflation, but consumer prices fell more than expected in December and is seen further declining in January.

Governor Erdem Başçı said on Jan. 27 that if January inflation falls more than a percentage point, the bank could hold an extraordinary meeting as early as next week to discuss cutting rates.

Inflation figures are due on Feb. 3.

The lira has long been under pressure due to potential rate hikes by the U.S. Federal Reserve, signaled for later this year.