The Turkish lira yesterday edged lower against the US dollar after ratings agency Fitch revised the country’s outlook to “negative” from “stable” over risks from monetary policy direction.
At 5:18am GMT, the lira stood at 13.75 to the US currency, about 0.6 percent weaker from Thursday’s close. The unit has lost about 46 percent of its value against the greenback this year.
The currency slumped to an all-time low of 14.0 this week after Turkish President Tayyip Erdogan defended the low-rate economic policy and as the dollar benefited from hawkish US Federal Reserve comments.
The ratings agency described the central bank’s easing cycle, which started in September even when inflation was accelerating, premature and said it caused deterioration in domestic confidence reflected in a sharp depreciation of the currency.
“Maintaining a deeply negative real policy rate could further undermine domestic confidence, increasing risks for financial stability, for example if depositor confidence is shaken, and potentially jeopardize the until now resilient access of banks and corporates to external financing,” Fitch said in the rating report.
Since September, the central bank has cut the policy rate by 400 basis points to 15 percent, but the governor signaled that aggressive policy easing would likely pause in January after one more rate cut this month.
Turkish inflation accelerated for a sixth month in November to the highest level in three years, driven by a slump in the lira that continues to cloud consumer price outlook.
Annual inflation climbed to 21.31 percent through last month, up from 19.89 percent in October. That was faster than the 20.7 percent median estimate in a Bloomberg survey of 20 analysts.
Monthly inflation was 3.51 percent, compared with a median estimate of 3 percent in a separate survey.
The “lira sell-off only began in mid-November and thus did not completely show through in” yesterday’s data, said Ehsan Khoman, head of emerging market research for Europe, Middle East and Africa at MUFG Bank in Dubai. “December’s inflation print will be materially worse.”
It is the first high-profile data point showing Erdogan’s plan to stabilize prices by lowering interest rates and letting the lira sink is backfiring. In the eyes of Erdogan, the lira’s weakness is the cost of turning Turkey into an industrial powerhouse and freeing the country from a dependence on short-term foreign cash, which flows into the economy when rates are high.
However, the currency’s 29 percent drop during November — the biggest monthly slump since Turkey adopted a floating exchange regime two decades ago — is fueling prices and unease among voters, carrying the exact opposite impact of what Erdogan is trying to achieve.
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