The Turkish lira plummeted more than 5 percent on Thursday as investors sought safe havens after Russian forces invaded Ukraine, sending the dollar, gold and commodity prices surging, and sparking concerns of fresh inflationary pressure in Turkey.
The lira weakened to as much as 14.62 against the dollar, its weakest level since late December, amid a full-blown currency crisis. It was the weakest currency among its emerging market peers, declining even more than Russia’s ruble.
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The lira had stabilized over the past two months, thanks to a scheme that protects lira deposits against depreciation and costly interventions from the central bank in the currency market.
It blew through a tight band that it had been stuck in for the past two months as volatility returned from Tuesday this week due to rising tensions between Moscow and Kyiv.
Its decline steepened on Thursday as the dollar strengthened after Russia invaded Ukraine by air, sea and land.
Ipek Ozkardeskaya, senior analyst at Swissquote, said it would be more difficult to keep the lira at a fixed level given the safe-haven flows to the dollar.
“Pressure is increasingly building and the cost of keeping the lira stable is therefore increasing,” she said.
“This doesn’t mean that things will automatically get out of control, but the risks of seeing a significant drop in the lira has increased,” Ozkardeskaya added.
The currency crisis, which saw the lira lose 44 percent of its value against the dollar, was sparked by a series of unorthodox rate cuts from the central bank, long sought by President Tayyip Erdogan.
The depreciation stoked inflation, which neared 50 percent in January and is expected to rise further in coming months.
Surging oil, gas and commodities prices are likely to put further upward pressure on inflation in Turkey, said Piotr Matys, senior FX analyst at In Touch Capital Markets.
“Consumer prices, particularly food prices, are likely to remain high for an extended period of time as commodity prices are rising globally. Food producers are going to have to deal with rising oil and gas prices,” he said.
Brent oil surged past $100/barrel for the first time since 2014 over the tensions, posing risks for energy importer Turkey, while wheat traded at its highest level this year.
The main BIST 100 stock index in Istanbul was down 8.7 percent at 1159 GMT, while the banking index fell 8.4 percent. The sharp decline in the indices triggered a trading halt on Thursday morning.
The rate cuts from the central bank last year were part of Erdogan’s new economic plan that prioritizes exports, current
account surplus, employment and low rates.
Turkey is also likely to see a sharp drop in tourism and export income this year from Russia and Ukraine, two countries that account for a significant portion of its visitors, said Murat Kubilay, an Istanbul-based economist.
“The stability program based on exchange rate-protected deposits and veiled reserves sales will be strained further,” he said.
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