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article imageTurkey central bank silent as lira 'freefall' intensifies

By Stuart WILLIAMS (AFP)     May 23, 2018 in Business

Turkey's embattled lira on Wednesday lost over three percent in value to hit new historic lows against the US dollar, but there was no word from the central bank of any emergency action to buttress the currency.

Following sharp losses on Tuesday, the lira continued to underperform all other emerging market currencies, after suffering a hammering in Asian trade overnight when Japanese investors sold Turkish assets.

It lost 3.3 percent against the dollar to trade at 4.82, only slightly paring losses after earlier for the first time ever testing the 5.0 ceiling by hitting 4.92 lira to the dollar.

Over the last month alone, the lira has lost over 18 percent in value against the dollar as fears grow over the health of the Turkish economy which is dogged by double-digit inflation despite high growth.

Its performance has been even worse than the Argentine peso which has also suffered severe turbulence over the last month.

The sharp fall in the currency's value has come at a hugely sensitive time as Turkey heads to June 24 presidential and parliamentary elections where President Recep Tayyip Erdogan is seeking a new mandate and a thumping parliamentary majority.

- 'Complete freefall' -

The next meeting of Turkey's central bank is not due until June 7 but economists believe an emergency -- and substantial -- rate hike by the central bank is not only on the cards, but essential.

"It seems highly likely that they'll take action," said William Jackson, emerging markets economist at Capital Economics in London, saying the bank needed to raise rates by 200-300 basis points to provide some support to the lira.

He told AFP the sell-off in the lira over the past few weeks has been even more severe than that which preceded the emergency hike by the bank in early 2014.

The bank and its chairman Murat Cetinkaya have been silent since May 16 when it issued a statement promising "necessary steps" to stabilise the currency.

Yet amid a growing clamour for action and the situation becoming more extreme, there was no new hint from the bank within market hours Wednesday.

"Since then (May 16) there has been a definite sound of silence in the forex market," said Inan Demir at Nomura International.

The situation has not been helped by Erdogan himself who has consistently pressured the central bank to keep rates down to boost growth.

He hurt the lira last week by saying he plans a greater say in monetary policy if he wins the elections, which markets saw as a slap in the face of the nominally independent central bank.

He has also made statements that fly in the face of economic orthodoxy, describing interest rates as the "mother and father of all evil" and saying low interest rates help keep down inflation.

Economists believe an emergency -- and substantial -- rate hike by the Turkish central bank is not o...
Economists believe an emergency -- and substantial -- rate hike by the Turkish central bank is not only on the cards, but essential
OZAN KOSE, AFP

"The currency is in complete freefall," said Jameel Ahmad, analyst at FXTM forex brokers, saying Erdogan's comments had been the "catalyst" for the lira's current woes.

- 'Disorderly adjustment risk' -

The Istanbul bourse said it was taking measures to convert its foreign exchange assets to lira to "fight speculative actions aimed at creating a negative image of Turkey", but it was unclear if this would have any impact on the currency.

An AFP photographer in Istanbul's Grand Bazaar said currency traders were refusing to sell dollars to limit their own losses amid the currency slide.

The economy has generally been a trump card for Erdogan in his 15 years in power, with the Turkish strongman crediting himself with ending chaos that brought the country to near financial meltdown in the 2000-2001 crisis.

But Jackson said if the central bank failed to tighten monetary policy "the risk of a disorderly adjustment and a sharp economic downturn -- possible a recession -- will mount."

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