Intensifying rancor between Ankara and its western allies – and the Turkish central bank’s decision to not raise interest rates – are souring investor sentiment.
Another day, another inauspicious record for Turkey’s embattled currency.
Turkey’s lira weakened further against the United States dollar on Tuesday, hitting a new record low as rancor between Ankara and its western allies intensifies and investor sentiment continues to sour after the central bank decided not to raise borrowing costs last week.
The lira stood at 8.1560 against the dollar at 08:42 GMT, its weakest level on record, compared to Monday’s close of 8.0900. The currency has lost some 27 percent of its value so far this year.
Piotr Matys, senior emerging markets forex strategist at Rabobank, said the low lira and the fading prospects of an economic recovery after the coronavirus pandemic was a “toxic mixture” that could lead to a full-scale crisis.
“Urgent action is required to stabilise the lira and prevent further damage to inflation, the real economy and to preserve what is still left from Turkey’s image as an attractive country to invest,” he said in a note.
Turkey’s central bank dashed widely held expectations last week that it would hike interest rates to shore up the lira and help tame double-digit inflation – especially in the face of depleted foreign exchange reserves.
Instead, central bank policymakers choose to leave the benchmark interest rate unchanged.
A growing list of geopolitical spats is also unsettling investors, including a deepening rift between Ankara and France that has seen Turkish President Recep Tayyip Erdogan call on Turks to boycott French goods.
Relations between Washington and Ankara fell under further strain after Turkey confirmed earlier this month that it had started testing a Russian-made S-400 air defence system- a move the US Department of Defense warned “risks serious consequences” for the US-Turkish security relationship.
The conflict in Nagorno-Karabakh and Ankara’s dispute with Greece over maritime rights and natural resources in the Eastern Mediterranean are also heightening geopolitical tensions.