(AFP File photo)
AFP – Turkey ramped up its defence of the lira on Monday when the central bank announced a crisis meeting after currency intervention failed to support the currency.
For months the central bank has been under strong pressure from the government, itself caught in a swirl of internal pressures, not to raise interest rates to bolster the lira.
And government officials describe the latest pressure pushing the currency down to record low levels as “temporary”.
But the central bank responded to the latest falls on Monday by announcing a crisis policy meeting on Tuesday.
The lira rallied slightly shortly after the announcement.
The statement came after the lira hit another record low value against the dollar despite heavy central bank intervention in the foreign exchange market last week.
Since the middle of last year the central bank has spent heavily from its currency reserves. This has steadied the lira on occasions but the respite has been short-lived each time and the currency has lurched down further.
“The Monetary Policy Committee is to convene on 28 January to evaluate recent developments and take precautions which are necessary for price stability,” the bank said in a statement.
The bank will also release its quarterly inflation report earlier on Tuesday and give its view of “the present economic situation, inflation projections and the underlying policy path,” Istanbul-based Finansbank said.
After the announcement, the lira recovered to 2.3346 against the dollar, after tumbling to a record low of 2.3616 to the dollar and 3.2345 to the euro in morning trading.
The main Istanbul stock index fell by 1.36% to 63,555.14 points.
Last week, Turkey’s central bank ploughed at least $2bn (1.5bn euro) into the foreign exchange market to shore up the currency, which has reached record lows repeatedly this year.
The bank has statutory independence but has been under strong political pressure not to raise interest rates.
The fall of the lira is rooted in an escalating political crisis over the corruption scandal that ensnared key allies of Prime Minister Recep Tayyip Erdogan, as well as concerns about the economy.
But government officials have played down the impact of the crisis on the economy as being only “temporary”.
The central bank has so far refrained from raising interest rates to defend the lira amid government concerns that any rise in rates could jeopardise the growth target.
The government has forecast that growth will pick up from an expected rate of 3.6 percent in 2013 to 4.0 percent for this year — down from more than 8.0 percent achieved in 2010 and 2011.
The European Bank for Reconstruction and Development has cut its forecast to 3.3 percent.
Turkey, like other emerging markets, is also vulnerable to US Federal Reserve plans to taper its monetary stimulus as it reduces access to cheaper funds to cover its account deficit, currently at over 7.0 percent of gross domestic product.
The London-based Capital Economics said in a statement that market turbulence in emerging markets including Turkey had led to talk of a “new crisis”.
It listed Turkey among those countries which have lived beyond their means and now face a period of weaker growth.
In addition to South Africa, parts of South East Asia and some countries in Latin America, Turkey falls into the category of countries that are “most vulnerable to Fed tapering and the shift towards tighter global monetary conditions over the next couple of years”, Capital Economics said.
Analysts say that the Turkish government created an “obsession” about interest rates, prompting the central bank to draw on its foreign currency war-chest but they warn that this response is unlikely to be sustainable.
When the governing Justice and Development Party (AKP) was shaken by nationwide unrest in June, Erdogan blamed various groups, including what he called an “interest rate lobby”.
This referred to pressure in some quarters for a rise in interest rates to support the currency and retain foreign capital.
