The Turkish lira touched a fresh record low on Tuesday ahead of a U.S. election that could strain bilateral ties, weakening after data showed annual inflation near 12% despite central bank moves to tighten policy.
The lira <TRYTOM=D3> – the worst performer in emerging markets this year – weakened as much as 0.5% to 8.4850 against the dollar from Monday’s close of 8.4400.
The currency is down 30% so far this year on concerns about possible Western sanctions against Turkey, depleted reserves, double-digit inflation, and monetary independence.
Analysts say relations between Ankara and Washington could be further strained if Joe Biden, the Democratic candidate, and front-runner, wins the U.S. presidential election on Tuesday.
“If you look at the lira it is not expensive, but there is a policy credibility issue,” said Aberdeen Standard Investments portfolio manager Viktor Szabo. “They are running up against a lack of reserves – they really have their backs against the wall.”
The central bank unexpectedly held its policy rate steady last month at 10.25%, while raising the top limit of its rates corridor to 14.75% to retain flexibility.
“The way they are tightening is not credible. They are widening the corridor so they can shift rates up, but it also means they likely will bring them down again,” said Szabo.
On Tuesday the central bank raised the lira interest rate in the swap market for dollars and gold to 13.25% from 11.75%. A day earlier it announced it was reduced to zero the borrowing limits at its interbank money market.
The bank’s so-called backdoor steps to tighten liquidity and fund the market through a higher rate have pulled the average cost of funding <CBTWACF=> up to 13.45% as of Monday.
High inflation has also been an important factor in pressuring the lira. Data on Tuesday showed consumer price inflation rose to 11.89% year-on-year in October, in line with a poll forecast, maintaining pressure for tight monetary policy.