Istanbul/Ankara: Turkeys lira pulled back from a record low of 7.24 to the dollar on Monday after the central bank pledged to provide liquidity, but it remained under selling pressure and its meltdown continued to rattle global markets.
The currency has lost more than 40 per cent against the dollar this year, largely due to worries about President Tayyip Erdogans influence over the economy, his repeated calls for lower interest rates, and worsening ties with the United States.
On Friday the slide turned into a crash: the lira dropped as much as 18 per cent, hitting US and European stocks as investors took fright over banks exposure to Turkey.
A fresh lira collapse on Sunday night hit Asian shares and drove global demand for safe currencies including the dollar, Swiss franc and yen. Shares in Europes major banks also fell.
Analysts say the crisis has been long time coming and reflects Turkeys refusal to raise interest rates to curb doubledigit inflation and cool an overheated economy. Erdogan, rejecting economic fundamentals as the cause of lira weakness, said Turkey was the target of an economic war.
“The developments over recent weeks have shown that Turkey is under siege,” he told a meeting of Turkish ambassadors. “It is clear that these attacks will continue for a while.”
He also said he expected the exchange rate to return to a rational level and that Turkey had an action plan in place.
In Berlin, German Chancellor Angela Merkel said “no one has an interest in an economic destabilization in Turkey” and that Ankara should ensure central bank independence.
The central bank, which surprised markets last month when it held interest rates despite the tumbling lira, announced measures on liquidity and reserves after Finance Minister Berat Albayrak said the economic action plan would start on Monday.
Bankers also said the central bank would meet banks lira liquidity needs at the overnight rate of 19.25 per cent — 150 basis points above the benchmark weekly repo rate — though it might not use the overnight funding on Monday because needs were low.
They said that could be the first step toward tightening policy via an interest rate corridor, an instrument used in previous years, rather than increasing the benchmark rate. The reserve requirement moves will free up 10 billion lira, $6 billion, and $3 billion equivalent of gold liquidity in the financial system, the bank said. It also pledged to provide “all the liquidity banks need”.
Why rupee's lira issue is getting out of hand
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Licking the wounds
13 Aug, 2018
Trade war pain is back, but in a different form. And the rupee is feeling it. This time, it's the US versus Turkey. On Monday, the local unit fell so much that the spectre of 70 looked menacingly real. The trigger is a plunging lira, which is sending the EM currencies sharply lower. A growing diplomatic rift between the US and Turkey is believed to have started the fire. There are many sides to this rupee story. Let's peel them off one by one.
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