Türkiye's lira slid towards an all-time low on Friday as traders continued selling the currency after the previous day's surprise central bank interest rate cut in the face of near 80% inflation.
Analysts and bankers said Thursday's cut to 13% from 14% was the central bank leaping on booming and potentially record tourist revenue, and also suited President Tayyip Erdogan's long-term drive for lower borrowing costs.
Worries the cut will just feed more inflation resulted in a decline of 1% in the lira on Thursday to 18.15 against the dollar.
It stood at 18.0870 at 1553 GMT on Friday, leaving it just above a record low of 18.40 per dollar which it had hit in December during the last major meltdown. That had been a brief "intraday" low, though, and the currency set a record closing low of 18.089 on Thursday.
"In our view, more important than the rate cut was the signal provided by the central bank that it was uncomfortable with the recent softening in loan growth and wished to pivot back towards boosting short-term growth," Deutsche Bank's Fatih Akcelik said.
He added that if that should prove right, it was likely to widen the country's current account deficit and send the lira lower in the coming months.
"We still expect sharp lira depreciation to lead the CBT (central bank) to hike its policy rate in the last quarter of this year," Akcelik said.
The central bank's cut on Thursday had lowered its key rate by 100 basis points and was its first move of the year.
There had been no signal beforehand that it had been coming although the country's badly depleted foreign reserves have nearly tripled since early July to $15.7 billion as tourists locked down by COVID-19 over the last two years have flooded back.
"It is important to evaluate rate cut decisions together with the increase in forex reserves in the last couple of weeks. Tourism is very strong and forex income through exporters is high. Apart from that there is an inflow from Russia of around $5-$6 billion," a senior banker said.
"The central bank could be thinking the reserves will increase further. I want to think they took the rate cut risk with guaranteed foreign financing flow," added the banker, who spoke on condition of anonymity.
Erdogan's way
Rather than tackling the highest inflation in 24 years with rate rises, as is the approach of other central banks, Türkiye's bank is driving Erdogan's economic program of policy stimulus to promote exports, investment and economic growth.
Exports, boosted by targeted low lending rates, have in turn risen. Adding to foreign inflows, Türkiye's tourism season is on pace to nearly match pre-pandemic numbers. Traders also speculate that a funding deal has been reached with Russia, though authorities have not commented.
JPMorgan analysts called the rate hike "opportunistic (and) driven by the fact that net and gross FX reserves have increased ... likely due to a combination of tourism revenues that have reduced the CA deficit ... and USD deposits from Russian Rosatom for a nuclear power plant project."
In a sign of market stress, Türkiye's 5-year credit default swaps rose to 792 basis points from 656 a week ago. Yet in a reminder of how investors have fled Türkiye in recent years, volatility gauges rose only slightly.
The central bank had slashed rates by 500 basis points towards the end of last year, sparking a currency crisis in December that sent inflation soaring. The lira has lost more than 27% against the greenback so far this year and over 90% over the last decade.
The bank's policy-setting committee said it needed to act because leading indicators pointed to a loss of economic momentum in the third quarter and the new policy rate was "adequate under the current outlook".
Goldman Sachs analysts said in a note that Türkiye's macroeconomic policy mix had become more unsustainable with the latest decision and forecast annualized inflation to rise to more than 90%.
Credit rating agency Fitch, which has downgraded Türkiye multiple times in recent years, said the negative outlook it still has on the country's rating reflects the risks of focusing on growth despite the worsening environment.
