Turkey’s lira crashed as much as 7% to a record near 15 to the dollar on Monday before whip-sawing back after the central bank intervened, gripped by worries over President Tayyip Erdogan’s risky new economic policy and prospects of another rate cut.
The central bank said it entered the market to sell dollars for the fourth time in two weeks, triggering the rebound after the currency had touched 14.99 where it was worth just half its value at the beginning of the year.
The bank moved to keep the lira below 14 last week but abandoned that level on Monday. Depreciation fuels inflation in the big emerging market economy that depends heavily on imports, and which is rattled after 400 basis points of interest-rate cuts since September.
The interventions are an additional risk for a central bank that is not only easing policy in the face of rising inflation, but that also has had depleted foreign reserves.
According to calculations of bankers analysing official data, the central bank sold $1.5-2 billion in dollars on Monday alone, after sales worth $2.5 billion in the first three efforts.
“The central bank has continued to intervene to soften the blow but this is akin to putting a band-aid on a gaping wound,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.
In response to the market turmoil Erdogan held talks with Central Bank Governor Sahap Kavcioglu, Finance Minister Nureddin Nebati and the heads of state banks in Istanbul, reports said.
Erdogan has repeatedly advocated for rate cuts as he promotes a new economic plan prioritising economic growth, credit, production and exports, despite widespread criticism of the policy from economists and opposition politicians.
The lira crash has sharply eroded Turks’ earnings, fuelling poverty and leading to lines of people waiting to buy cheap bread as the price of goods surges. Lawmakers have brawled amid rising tensions in parliament as the opposition slammed government handling of the economy.