The Turkish lira hits a new record low against the dollar as investors prepare for another interest rate cut

An electronic board displays exchange rate information at a currency exchange office in Istanbul, Turkey, on Monday, August 29, 2022.

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The Turkish lira hit a new record low on Thursday, trading at 18.377 against the dollar at 11:30 am in Istanbul, and it continues to drop more than 27% against the dollar this year.

The drop comes as investors prepare for another potential interest rate cut – or just a comment on the current rate – as Turkey refuses to follow economic orthodoxy in fighting soaring inflation, which has now reached more than 80%.

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Or, in fact, investors who can still bear the fluctuations of the Turkish market.

The Eurasian hub of 84 million people – still heavily exposed by many major banks in Europe and the Middle East, and heavily exposed to geopolitical tensions – has seen significant market turmoil in recent days, as well as dramatic drops in currency rates in the eurozone. . The past few years.

This week witnessed a significant decline in the Turkish stock market, the Istanbul Stock Exchange, as the shares of Turkish banks fell by 35% during the week ending last Monday, after recording a 150% rise between mid-July and mid-September. It prompted regulators and brokers to hold an emergency meeting, although in the end they decided not to intervene in the market.

The reason for the volatility? First, high inflation in Turkey has prompted investors to pour their money into stocks to protect the value of their assets. But analysts believe it was the fear of rising inflation in the US, and the consequent hike in interest rates from the Federal Reserve, that most likely triggered a sudden downward turn.

The drop wiped out more than $12.1 billion from the market capitalization of the country’s listed banks.

The number of Russian tourists to Europe decreased significantly during the summer, but increased in several other destinations, including Turkey (here).

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This is because the high interest rates set by the United States and the resulting strength of the dollar are causing problems for emerging markets such as Turkey, which imports its energy supplies in dollars and has large debt denominated in dollars, and therefore will have to pay more for it.

Market guidance prompted margin calls, which is when brokerages ask investors to add money to their positions to avoid losses in shares they bought on “margin” or borrowed money. That escalated the selling further, until Turkey’s main clearing house, Takasbank, announced on Tuesday that it would ease requirements for collateral payments on margin trading.

Bank shares and the stock exchange as a whole rebounded slightly on the news, with the stock market up 2.43% since Monday’s close at 2:00 pm in Istanbul. The Istanbul Stock Exchange is still up by 73.86% year-to-date.

High Inflation: What’s Next for the Central Bank?

But analysts say the bourse’s positive performance is not in line with Turkey’s economic reality, as they look forward to the Turkish central bank’s interest rate decision on Thursday.

In the face of inflation just above 80%, Turkey shocked markets in August with a 100 basis point interest rate cut to 13% — sticking to President Recep Tayyip Erdogan’s firm belief that interest rates will only increase inflation, contrary to widely held economic principles. . All of this is happening at a time when most of the world is tightening monetary policy to combat soaring inflation.

State watchers expect another cut, or at most a suspension, which will likely mean more trouble for the Turkish lira and the cost of living for Turks.

Economists at London-based Capital Economics expect an interest rate cut of 100 basis points.

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Liam Beach, senior emerging markets economist at Capital Economics, told CNBC.

“While the Central Bank of Turkey is under such pressure, we believe that it will continue this cycle of rate cuts for perhaps an additional month or two… the window for rate cuts is small.”

Timothy Ash, emerging markets strategist at BlueBay Asset Management, also expects a 100 basis point cut. Asch said Erdogan would not need a justification for this, noting that future elections are the reason behind the move.

Meanwhile, analysts at investment bank MUFG expect a stop at the current rate of 13%.

Economists expect continued high inflation and further falls in the lira, which has already fallen 27% against the dollar since the start of the year, and 53% in the past year.

Meanwhile, Erdogan remains optimistic, and expects inflation to fall by the end of the year. “Inflation is not an insurmountable economic threat. I am an economist,” the president said during an interview on Tuesday. Erdogan is not an economist by training.

Regarding the impact of Erdogan’s decisions on the Turkish stock market, Asch said, “The danger of these unconventional monetary policies is that they create resource misallocation, and eventually burst bubbles, causing significant risks to overall financial stability.”

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