Turkey’s Finance Minister Berat Albayrak ruled out intervening to support the record-low lira currency and reiterated government concerns that rising interest rates could hurt the economy, Milliyet newspaper reported on Thursday.
Albayrak said uncertainty around the U.S. election and the coronavirus pandemic had boosted the dollar, adding that the exchange rate was not the only factor reflecting Turkey’s economic performance with production, exports, and employment ahead of other countries, the newspaper said.
His comments coincided with data from the central bank showing net reserves have shrunk by $2.28 billion to $18.93 billion while Turkish locals’ holdings of foreign currencies and gold – seen as a gauge of domestic confidence in the currency – have risen to a record high of $221.04 billion.
Meanwhile, the lira <TRYTOM=D3> struggled again, hovering close to Tuesday’s record low against the dollar – an outlier among emerging market currencies that enjoyed broad support as the greenback slipped to a two week low. The lira also briefly crashed through the 10 to the euro level <EURTRY=R>, weakening nearly 1%.
Analysts increasingly expect that the central bank, under pressure from stretched FX reserves, could be forced to raise rates again to head off the lira’s 30% depreciation this year, and to address inflation stuck around 12%. The currency has tumbled more than 8% in just under two weeks.
Sticking to a familiar government line, Albayrak said it was possible to curb the rise of foreign currencies through interest rates but the government did not prefer this method because of “concern that a rate hike will decrease production and … employment”.
In the comments made in response to AK Party lawmakers, Albayrak also added “the (currency) fluctuation was not well above expectation” and intervention in the exchange rate had not been considered yet.
Analysts are concerned about the toll of FX interventions on already stretched reserves, with Goldman Sachs estimating on Thursday that the central bank has burnt through $101 billion on such operations so far this year.
Albayrak’s words did little to soothe investor concerns about the central bank’s independence. Commerzbank analyst Tatha Ghose said the comments contradicted a tightening bias articulated by the central bank (CBT) and further undercut its political independence.
After a formal tightening in September, the central bank held its policy rate <TRINT=ECI> steady at 10.25% last month, against expectations for a rate hike, but raised the top limit of its rate corridor <TRLLW=ECI> to 14.07%.
So-called back-door measures had lifted the average cost of funding <CBTWACF=> to 13.94% by Tuesday.
“Albayrak basically confirmed that the CBT has gone out on a limb, without the blessing of political leaders, to tighten monetary policy” in recent months, Ghose said.
“The market will look through such tightening even more now, and the exchange rate is likely to soon come under pressure.”