Turkish lira on two-week slide that tests central bank’s tight policy pledge

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Turkey’s lira was down 0.7 percent on Monday and has fallen in 10 of the last 11 sessions as domestic inflation, global bond yields and oil prices have all risen, setting up a test of the central bank’s tight policy pledge.

After raising rates to 17 percent in December, central bank Governor Naci Agbal said on Friday, “We are going to take firm steps” to stabilize double-digit inflation. He added “a paradigm shift” happened in November when he took the bank’s reins.

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But while the lira had rallied some 20 percent since early November, it has given back half those gains in the past two weeks. By 0907 GMT, it was at 7.575 versus the dollar, near its lowest so far this year.

Turkey’s Central Bank Governor Naci Agbal during an interview in his office in Istanbul, Turkey. (Reuters)
Turkey’s Central Bank Governor Naci Agbal during an interview in his office in Istanbul, Turkey. (Reuters)

For import-reliant Turkey, which produces virtually none of its energy needs, the sliding lira raises import prices. US crude oil rose to its highest price in more than two years on Monday after reports of attacks on Saudi facilities.

Yields on the 10-year US Treasury were at year’s highs, which pulls funds out of riskier emerging markets like Turkey, whose assets are particularly volatile.

“The rise in long-term borrowing rates and oil prices led investors to worry about inflation globally” and the recent lira slide has “kept interest towards local assets under pressure,” Is Invest said in a note.

Analysts increasingly expect the central bank to raise rates next week to stabilize the currency and address inflation, which rose above 15 percent last month.

Turkey has the highest policy rate of any advanced or developing country, and rate cuts were expected later in the year. Agbal’s comments on Friday, in a blog post, were taken by some as a sign the bank will first tighten more.

It “was interpreted by the market as promising another rate hike soon, in order to establish even more credibility. We, too, think that another 100bps rate hike has become more likely at this month’s meeting,” said Tatha Ghose at Commerzbank.

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