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Turkish lira at historical low

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Turkey’s lira started the week at an all-time low against the dollar and the euro, with uncertainty looming over further interest rate cuts, as President Recep Tayyip Erdogan dismisses three central bank policymakers.

The lira, which has weakened more than 19% this year, hit an all-time low of 10.7235 against the euro while touching on a record 9.28 against the US currency on Saturday.

The previous low was 10.53 against the euro on 4 June this year.

An abrupt drop was recorded in the currency after Thursday when President Erdogan sacked three Central bank policymakers, two of which were seen to oppose the bank’s 100 basis-point rate cut to 18% last month.

Their dismissal was seen as a clear message of Erdogan’s continuous interference in decisions regarding monetary policy, with analysts now expecting more easing of cuts on interest rates in the short term.

A survey by the central bank showed market participants expected the rate to hit 16.6% in three months, representing cuts of 140 basis points, while inflation expectations rose.

“These frequent replacements of decision-makers is underlining the message that the central bank is not independent and under enormous political pressures,” Selva Demiralp, the director of the Koc University-TUSIAD Economic Research Forum and a former US Federal Reserve economist told Reuters.

She said the lack of credibility made markets nervous because the bank’s inflation goal of 5% would likely be harder to achieve and also because any future rate hikes would be less effective.

Analysts viewed the latest central bank personnel changes as fresh evidence of political interference by Erdogan, a self-described enemy of interest rates who frequently calls for monetary stimulus.

“We think rate cuts in Turkey are premature at this point, but it has been clear for some time that the president wants the central bank to reduce them further and has the political power to influence this,” said Thomas Clarke, portfolio manager at William Blair Investment Management.

The central bank is expected to cut the benchmark interest rate by 100 basis points to 17% at its next meeting on 21 October.

The Turkish lira has been on a rollercoaster ride for most of 2021, despite the lira poised to become this year’s emerging market success story, having recovered almost a fifth from a low against the US dollar at the beginning of the year.

Foreign investors had been pouring back in, lured by high interest rates, the lira was outperforming most of its peers, and Turkey’s economy had been looking forward to a year of strong growth.

According to the initial results of a Reuters poll, most economists expect a rate cut.

However, the lira started trembling after Erdogan started taking surprise actions such as sacking his central bank governor, following a recent significant rate hike in early March.

Meanwhile, Turkey’s government separately recorded a September budget deficit of 23.59 bln lira compared to 29.67 bln lira a year earlier, improving mainly due to a rise in tax income.