August 27, 2013 12:08 pm

Turkish lira leads region’s markets lower

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The Turkish lira dipped to a record low on Tuesday on fears of a possible US strike against Syria, while Turkish central bank governor Erdem Basci failed to allay concerns about the currency’s decline.

Mr Basci, speaking to reporters, predicted no interest rate increases until the end of the year. “The top interest rate will not exceed 7.75 per cent,” he said.

“We’re not worried at all about the foreign currency exchange rates,” he said, but added that he expected the lira to strengthen significantly. “Don’t be surprised if dollar hits TL1.92 or lower by the end of the year.”

Mr Basci also maintained the bank’s year-end inflation forecast. “We are comfortable with a forecast to 6.2 per cent,” he said.

Markets were not reassured. The lira, which traded at TL1.9960 to the dollar in early trade, dropped sharply following Basci’s statement. The dollar climbed 2.2 per cent to a record TL2.04.

The lira has fallen by about 8 per cent against the dollar since the Federal Reserve’s May 22 announcement that it would begin scaling down bond purchases this year. The stock market, meanwhile, continued to take a beating, with losses extending to 4.7 per cent by the close, following a plunge of almost 9 per cent last week. The market has fallen more than 30 per cent since a high in late May.

Yields on the benchmark 2-year bond rose to more than 10 per cent, almost a full point higher than last week and more than double the rate in May.

Burcu Unuvar at IS Investment in Istanbul said the manner in which Mr Basci’s statement was made could not help but rattle investors.

“Basci gave a future commitment at least until the end of the year without the participation of the [board] members. From now on, investors will question if monthly policy in Turkey is really data dependent, because if it were data dependent he would not have been able to make such a commitment,” said Ms Unuvar.

The central bank’s August 20 decision to increase lending rates by 50 basis points, up to 7.75 per cent, had been too little, too late, analysts said. Instead of an aggressive front-loaded rise to about 9 per cent, said Ms Unuvar, “the central bank is fighting cancer with a painkiller, and it won’t work”.

“As long as the bank refuses to change tack, the markets will test it,” she said.

Tim Ash of Standard Bank said in a note last week that the bank appeared to be more concerned about helping the government achieve its 3-4 per cent growth target, and less so about the weakening lira and inflation, which hit 8.8 per cent in July.

Across the region today, markets continued to post large losses in response to speculation of possible military action against Syria, with Israel’s TA 100 index falling 1.6 per cent and markets in Abu Dhabi, Kuwait, and Saudi Arabia reporting losses in excess of 3 per cent. The Israeli shekel weakened by 1.1 per cent.

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