The Turkish lira hit fresh lows against the dollar on December 2 as President Recep Tayyip Erdogan renewed calls for lower borrowing costs.
Erdogan, once declared himself as the enemy of interest rates, has been urging the central bank to slash its rates to boost the slowing economy. However, faced with the sharp depreciation of the lira, the central bank was forced to raise rates last month. The first in nearly three years rate hike, however, was unable to offset concerns over domestic politics and external risks that keep hammering the currency.
The governing AKP party and the nationalist opposition party MHP announced on December that they reached a broad consensus on the constitutional reform will that would pave the way for the establishment of an executive presidency. The AKP plans to submit the bill to parliament next week, hoping to hold a referendum on the presidential system in the spring or at the start of the summer of 2017. Investors are worried that the government will be mainly focused on the popular vote and may ignore much-needed economic reforms as the Turkish economy is facing several challenges. The economy is slowing and its large current account deficit is making it vulnerable to shifts in sentiment towards emerging economies.
“There is no other option but to cut rates,” Erdogan said in a public speech in Ankara on December 2. He also urged people to use their under-the-mattress foreign currencies to buy gold and the lira. The president believes the market turmoil will be short-lived. The lira weakened to 3.5153 from 3.4981 as he spoke. The currency was trading at 3.5224 as of 13:05 Istanbul time. The main stock exchange index, BIST-100, was up 0.19%.
The central bank said that its gross foreign exchange reserves declined to $99bn from $101.3bn in the week to November 25 mainly due to recent cuts in the reserve requirement ratios. Still, FX reserves are above the $92.86bn level they had on January 29, 2016, which was the lowest level since September 7, 2012.
On the contrary, domestic households foreign exchange deposits and funds rose to $144.1bn from $143.1bn in the week to November 25, the bank said.
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