Near record low for Turkish lira due to crisis with US and rates policy

Near record low for Turkish lira due to crisis with US and rates policy
The Turkish lira is suffering from Turkey's cold relationship with the US.
2 min read
26 April, 2021
In March, Erdogan had fired its market-friendly governor Naci Agbal [Getty]

The Turkish lira slipped 0.6 percent on Monday to 8.48 to the dollar, plunging the currency to its lowest point in months.

This devaluation came after US President Joe Biden recognised the 1915 killings of Armenians by Ottoman forces as "genocide" over the weekend, sparking an angry response from Turkey.
The plunge also follows the new central bank chief's comments that changing interest rates would send a "bad" message to the economy.

It saw the lira plunge 3.5 percent over the past three days with fears that worsening relations with the US could impact on the lira.

In a bid to smooth tensions, Ibrahim Kalin, President Recept Tayyip Erdogan's spokesman, told Reuters said it was in no one's interest to "artificially undermine ongoing relationships for narrow political agendas".

"Everything that we conduct with the United States will be under the spell of this very unfortunate statement," he added.

Financial experts believe that the genocide declaration by President Joe Biden could lead to repercussions on the markets.

"Market negativity is intense. (The) risk of an overshooting episode is unfortunately elevated," said Robin Brooks, chief economist at the Institute of International Finance, on Twitter.

It is not the first time that Turkey was at odds with the US, the latest episode involving former President Donald Trump in 2018 when Ankara was sanctioned.

The situation is also connected to the decision from new central bank governor Sahap Kavcioglu to drop a pledge to deliver more rate hikes on 15 April during his first Monetary Policy Committee meeting. "Who is happy with high interest rates?" he asked on television.

The Monetary Policy Committee said it "has decided to maintain the tight monetary policy stance by keeping the policy rate unchanged" and quickly after the declaration, the lira fell slightly.

William Jackson, chief emerging markets economist at Capital Economics said that the decision showed Kavcioglu "will take the inflation target seriously".

"But the language also suggests that they are looking for opportunities to lower interest rates… This statement only talked of keeping real interest rates above inflation. With the one-week repo rate at 19 percent and inflation at 16.2 percent, that already offers scope to reduce rates."

In March, Erdogan fired the bank's market-friendly governor Naci Agbal after he used his four-month term to aggressively raise rates to fight inflation, and replaced him with Kavcioglu, known to share the monetary policies view of the president. It had caused the lira to plunge 15 percent.

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