Turkish lira slides 5%; central bank says it will monitor risks

The Turkish lira weakened for the third consecutive day on Wednesday, tumbling 5% and eating further into the huge gains made the previous week, as worries persisted over soaring inflation and unorthodox monetary policy.

The losses gathered pace after little initial reaction to the central bank’s (CBRT) 2022 policy document, in which it said it will monitor risks related to the foreign exchange market and do what is necessary to ensure it runs smoothly.

The lira plunged as far as 12.45 against the dollar and traded at 12.3 by 1034 GMT. Despite surging more than 50% last week following state-backed market interventions, it has lost 40% of its value this year.

“The CBRT has no commitment to any exchange rate level and will not conduct foreign exchange buying or selling transactions to determine the level or direction of the exchange rates,” the bank said.

It said it would monitor closely the impact of its policy decisions in the first quarter and “the policy framework will be reassessed in order to create a foundation for sustainable price stability.”

The lira surged last week after billions of dollars of state-backed market interventions and a government move to cover foreign exchange losses on certain deposits, restoring the currency back to its mid-November levels.

The recovery came after President Tayyip Erdogan unveiled an incentive for savers to convert foreign exchange deposits into lira, under which the losses incurred due to any erosion in lira value during the deposit period would be reimbursed.

Hasnain Malik at Tellimer said this provided a free currency hedge to domestic savers if the lira depreciates. “But this also implies higher quasi-fiscal costs should the credibility of this hedge or the currency weaken,” he said.

The lira hit an all-time low of 18.4 to the dollar before Erdogan’s announcement, after weakening for months due to fears of surging inflation following a series of interest rate cuts sought by the president.

Annual inflation is forecast to have hit 30.6% in December, a Reuters’ poll found, breaching the 30% level for the first time since May 2003 – six months after Erdogan’s AK Party first came to power.