Mon, August 15, 2022

Erdogan’s Decisions Continue to Affect the Turkish Lira

Erdogan’s Decisions Continue to Affect the Turkish Lira

On Monday, the Turkish lira fell to 9.85, its another all-time low after President Tayyip Erdogan said he ordered the expulsion of ambassadors from the U.S. as well as nine other Western countries.

A combination of problems stoked market volatility and sent Turkey’s sovereign dollar bonds tumbling. After touching the record low against the U.S. currency overnight, the lira rebounded to 9.765 bt 09:41 GMT.

Two days ago, Erdogan said he told his foreign ministry to expel ambassadors for demanding the release of Osman Kavala. Authorities arrested Kavala in 2017.

By Monday morning, there was no sign that the country’s foreign ministry had yet carried out Tayyip Erdogan’s instruction. His decision would open the deepest rift with the West.

President Erdogan will chair a cabinet meeting at 3 p.m when decisions could be made on whether to move ahead. Usually, the country’s leader Erdogan issues a statement after meetings, around 16:00 GMT.

Independently, state lenders Ziraat Bank, Vakifbank, as well as Halkbank lowered their loan rates by up to 200 basis points. State lenders’ decision could support some borrowers but also exacerbate pressure on the lira and economy, given that Turkey’s benchmark yields shot up after the central bank slashed its policy rate by 200 points to 16% last week.

Turkish Lira and its problems

The Turkish lira lost 24.5% of its value so far in 2021. It lost 24.5% in a selloff that accelerated after the central bank eased policy, despite rising inflation. Economists and opposition lawmakers criticized the central bank’s decision.

The country’s central bank is clearly signaling that growth takes precedence over inflation. This is not the end of the story, as another rate cut is likely at the next policy meeting. The meeting will place on November 18.

Importantly, with the selloff continuing, Turkish credit default swaps, which insure against default, reached its highest level since March, as did lira implied volatility gauges.

The situation in Turkey is already quite complicated. Erdogan’s latest decision has the potential to create even more problems. His political opponents said Erdogan’s call to expel the ambassadors was an attempt to distract attention from Turkey’s economic problems. The central bank’s Governor Sahap Kavciouglu to mandate rate hikes. He has no other option but to spend foreign exchange reserves the central bank does not have.

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