Turkish lira in historic 15% crash after Erdogan stokes fire sale

ISTANBUL, Nov 23 (Reuters) – Turkey’s lira nose-dived 15% on Tuesday in its second-worst day ever after President Tayyip Erdogan defended recent sharp rate cuts, and vowed to win his “economic war of independence” despite widespread criticism and pleas to reverse course.

The lira tumbled to as low as 13.45 to the dollar, plumbing record troughs for an 11th straight session, before paring some losses. It has shed 45% of its value this year, including a near 26% decline since the beginning of last week.

Erdogan has applied pressure on the central bank to pivot to an aggressive easing cycle that aims, he says, to boost exports, investment and jobs – even as inflation soars to near 20% and the currency depreciation accelerates, eating deeply into Turks’ earnings. read more

Many economists called the rate cuts reckless while opposition politicians appealed for early elections. Turks told Reuters the dizzying currency collapse was upending their household budgets and plans for the future.

While authorities have not intervened to stem the selloff, two sources said Erdogan met with central bank Governor Sahap Kavcioglu on Tuesday but gave no further details. The bank did not comment on the lira’s plunge.

Former central bank deputy governor Semih Tumen, who was dismissed last month in the latest of Erdogan’s rapid leadership overhaul, called for an immediate return to policies which protect the lira’s value.

“This irrational experiment which has no chance of success must be abandoned immediately and we must return to quality policies which protect the Turkish lira’s value and the prosperity of the Turkish people,” he said on Twitter.

Tuesday’s slide was the lira’s worst since the height of a currency crisis in 2018 that led to a sharp recession, and brought on three years of sub-par economic growth and double-digit inflation.

Though the lira recovered half its losses by 1413 GMT, at 12.485 to the dollar, the last 11 days has been its worst run since 1999. Over just three hours of volatile trading on Tuesday, its value bounced to 13 from 12 to the dollar.

The central bank has slashed rates by a total of 400 points since September, leaving real yields deeply negative as virtually all other central banks have begun tightening, or are preparing to do so.

SLIDING POLLS

The lira has been by far the worst performer globally this year due mostly to what some analysts have called a premature economic “experiment” by the president who has ruled Turkey for nearly two decades.

Erdogan’s AK Party is sliding in opinion polls ahead of elections scheduled for no later than mid-2023, reflecting sharply higher costs of living.

“Prices are rising too fast. I don’t want to buy certain products because they’ve got too expensive,” said Kaan Acar, 28, a hotel executive in southern Turkey’s Kalkan resort, adding he was thinking of cancelling a trip abroad due to the rising cost.

“The fault lies with President Erdogan, the AKP government, and those who for years turned a blind eye and supported them.”

Investors appeared to flee as volatility gauges spiked to the highest levels since March, when Erdogan abruptly sacked the hawkish former central bank chief and installed Kavcioglu, who like the president is a critic of high rates.

Against the euro, the currency weakened to a fresh record low beyond 15 on Tuesday.

The 10-year benchmark bond yield rose above 21% for the first time since the start of 2019. Sovereign dollar bonds suffered sharp falls with many longer-dated issues down 2 cents, Tradeweb data showed.

As the lira plunged, Turkey’s main share index (.XU100) rose more than 1% due to suddenly cheap valuations. However bank stocks dropped, with the banking index down 2.5%.

EMERGENCY HIKES

The central bank cut its policy rate last Thursday by 100 basis points to 15%, well below inflation of nearly 20%, and signalled further easing.

Erdogan received support on Tuesday from his parliamentary ally, nationalist MHP leader Devlet Bahceli, who said high interest rates limit production and that there was no alternative to a policy focused on investments.

“Turkey needs to rid itself of the hunchback of interest rates,” Bahceli said in a speech to his party in parliament.

Erdogan defended the policy late on Monday and said high rates would not lower inflation, an unorthodox view he has repeated for years. read more

“I reject policies that will contract our country, weaken it, condemn our people to unemployment, hunger and poverty,” he said after a cabinet meeting, prompting a late-day slide in the lira.

Analysts said emergency rate hikes would be needed soon, while speculation about a cabinet overhaul involving the more orthodox finance minister, Lutfi Elvan, has also weighed.

Societe Generale predicted an “emergency” hike as soon as next month, with the policy rate rising to about 19% by the end of the first quarter of 2022.

Ilan Solot, global market strategist at Brown Brothers Harriman, said Erdogan would likely wait until a “breaking point” before reversing course.

“Right now locals seem content to keep their dollars in the local system. If they start to move money elsewhere, to Germany, to Austria, it’s another story,” Solot said.

“At that point we are talking capital controls. There are not enough dollar reserves, not enough dollars in the system to handle that. Then we will have a conversation about a real currency crisis,” he added.

Additional reporting by Ali Kucukgocmen in Istanbul, Ece Toksabay in Ankara and Karin Strohecker, Marc Jones and Tommy Wilkes in London; Writing by Jonathan Spicer; Editing by Gareth Jones and Susan Fenton

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