The Turkish lira (TRY) on November 21 was testing fresh all-time lows while Turkey's 10-year government bond benchmark yield climbed as high as 13.18% as worries over whether the central bank has lost its independence and entrenched tensions with the US and intractable differences with the EU weighed on investor sentiment.
At one point, the TRY fell as low as 3.9780 before strengthening very moderately later in the day—at 1030 Istanbul time on November 22 it was trading at 3.9618. The central bank made some efforts to step in to support the lira with measures to tighten liquidity but analysts were less than impressed, talking of too little, too late. Many analysts say it is clear that to fight surging double-digit inflation and its overheating economy Turkey needs an interest rate hike, pure and simple, but they fear President Recep Tayyip Erdogan's mounting unorthodox pressure for the opposite move has tied the central bank's hands behind its back.
The veiled and limited tightening moves made by the regulator on November 21 were viewed as a step taken to buy time ahead of its scheduled monetary policy committee (MPC) meeting on December 14, with the aim of avoiding an interim meeting. But assessing the moves as worth 25 basis points, Timothy Ash, senior sovereign strategist at BlueBay Asset Management, said in a note to investors: “A complete joke—like 25 basis points will make any difference. They are now limping to the next monetary policy committee meeting, which is weeks away and likely will have to have another late night, emergency MPC meeting before then to get the green light from Erdogan for a more substantive rate hike.”
“Banks’ borrowing limits at the Central Bank Interbank Money Market for overnight transactions have been reduced to zero effective as of November 22,” the national lender explained in a statement. The banks’ limit for intraday liquidity would also be increased, it said.
“The weighted average cost of funding [as a result of the measures] would be increased to 12.25% on November 22, up from 11.99% on November 20,” an official from the central bank told Reuters. According to the official, all funding would be made via the late liquidity window for which the central bank moved up to 12.25% in April.
“The sell-off in the lira may in part be attributed to shifting expectations for US monetary policy, but other factors are also at play,” senior emerging markets economist William Jackson at Capital Economics wrote in a note to investors.
The Turkey-centric factors exerting pressure on the lira may fade and politics-related sell-offs in Turkish assets tend to be short-lived, he added. “The recent falls in the lira are similar in scale to those that have previously prompted a more aggressive response by the central bank. As a result, were the slide in the lira to continue in the coming weeks, an emergency MPC meeting would be a very real possibility,” Jackson concluded.
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,” Ash at BlueBay, said in a November 20 note to investors.