Turkey’s central bank took steps on Tuesday to support the lira after the currency fell to a record low but faces a battle to win investors’ trust due to persistent political interference, deteriorating US relations and rising inflation. The lira fell more than 1 per cent in Tuesday morning trading, putting it within sight of 4 liras to the dollar, while bond yields climbed to a record peak. The lira has lost 11.4 per cent of its value in two months, making it comfortably the worst-performing emerging market currency in that period. The benchmark 10-year government yield has risen sharply in recent days, touching a high of 12.74 per cent on Tuesday, up from 12 per cent at the end of last week. The Bist 100, its main stock exchange, was firmer on Tuesday but has fallen 9 per cent in recent weeks. Paul McNamara, EM investment director at GAM, said that, while the base case was for the central bank to increase rates aggressively and the currency to come back from the brink, “there is a scenario where the lira goes into meltdown”. After falling to TL3.97, the lira rallied in response to the Central Bank of Turkey’s announcement of a cut in borrowing limits — which boosted funding costs for banks by an average of 0.25 percentage points — and was trading at about TL3.95.
But analysts remain bearish on the lira’s prospects. “Liquidity conditions have been tightened somewhat this morning but it isn’t clear that this will be enough to stem the tide,” said Kit Juckes at Société Générale. The CBRT’s struggles to maintain its independence has long been a source of concern for investors. President Recep Tayyip Erdogan has consistently demanded that interest rates should remain low, an argument he repeated last week. The central bank may feel obliged to undertake some verbal intervention if the lira continues to decline, said EM strategist Piotr Matys at Rabobank, which might include a signal that it was ready to act to raise rates when it next meets on December 14. But that meeting is more than three weeks away, he noted. “I wouldn’t exclude an emergency meeting,” said Mr Matys. “A rate rise is probably going to be unpopular among Turkish officials. That said, the priority is to stabilise the currency and prevent inflation from accelerating further.” Investors are also alarmed at US-Turkey relations, which has seen both countries suspend visa applications. Although visas are again being issued, tensions remain as a gold trader prepares to go on trial in New York next week over attempts to circumvent sanctions with Iran. Turkey’s balance sheet was the weakest of the main EM economies, Mr McNamara said, and because it is a big importer of oil the relatively strong oil price was also unhelpful. “The medium-term outlook is bearish but I would be cautious taking a position at this late stage,” he added Ulle Adamson, portfolio manager at T Rowe Price, said although the Turkish economy had grown in 2017, driven by strong lending growth and consumer demand, the upswing would only reap short-term benefits.