The Turkish lira (TRY) was wobbling again in trading on November 20, falling back through the 3.90 to the dollar level as the markets digested the latest chapter of President Recep Tayyip Erdogan’s unorthodox battle against high interest rates and remained unimpressed by central bank attempts to support the currency. At 1600 Istanbul time, it had weakened to a record low of TRY3.9249/dollar.
The yield on 10-year lira debt, meanwhile, climbed to a record 12.97% while analysts tried to assess the damage that might be caused by Ankara’s latest big row with Washingon—Turkey is claiming that the upcoming New York court case over alleged evading of US sanctions against Iran by Iranian-Turkish gold trader Reza Zarrab and Halkbank is a conspiracy-driven affair arranged by the Gulenist movement it insists was behind last year’s attempted coup. Turkey said it has launched an investigation into the US prosecutors behind the case which, should it result in guilty verdicts, could lead to hefty fines against Turkish banks.
Apart from the court case and other destabilising rows—such as human rights arguments that are destroying Turkey’s chances of acceding into the European Union—analysts are still scratching their heads over how Erdogan can again be demanding interest rate cuts given the more and more fragile state of the economy. Turkey’s annual inflation moved up from 11.2% in September to 11.9% in October, the steepest level recorded since October 2008.
“Everything… points to overheating—but Turkish policy makers seem to be in denial,” Timothy Ash, a senior sovereign strategist at BlueBay Asset Management, said in a November 20 note to investors.
After a period of quiet in his campaign against high interest rates, Erdogan on November 17 lashed out once more at the Turkey's central bank over its monetary policies.
“They say central banks are independent, so don’t interfere. This is what happens when we haven’t interfered. The central bank is on the wrong path,” he said.
Erdogan criticised the national lender for missing all its targets while he reiterated his unorthodox view that high interest rates cause high inflation. On the contrary, analysts have been underlining the need lately for Turkey to apply some monetary tightening to rein in surging consumer prices.
Erdogan also hit out at the commercial banks for making fat profits and providing loans with high interest rates.
“If you give credits with such high interest rates, of course investments will be hindered,” Erdogan told a group of officials of the ruling AKP party in Ankara.
“It cannot go on like this, we are going to deal with the high interest rates,” he said.
In an attempt at halting further depreciation of the TRY, the Turkish central bank said on November 18 that it was set to sell local banks one-, three- and six-month forward contracts with a $3bn cap through year-end. That would offer some respite to companies with a foreign-currency short position of more than $200bn, by protecting them against currency slides while removing some speculative demand out of the market.
The combined net income of Turkey's banks increased by 28.6% y/y to hit TRY37.2bn (€9.86bn) across January-September, banking sector watchdog BDDK reported last month.
Erdogan said there may be a meeting next week with the prime minister, relevant ministers and state banks to discuss the issue of the high rates.