The Turkish lira on Thursday continued its slide ahead of the country’s central bank meeting.
The currency fell to a record low of 10.98 against the dollar, but pared some losses to trade at 10.72 on Thursday afternoon in Asia.
Turkish President Recep Tayyip Erdogan on Wednesday sent the lira spiraling when he said he will continue to fight to bring interest rates down. Erdogan previously said interest rates are “the devil” and that lower rates will reduce inflation, in direct contrast to what most economists believe.
The president has also fired multiple central bank policymakers this year, including central bank chief Naci Agbal, who raised the country’s main interest rate during his time in the position.
While the lira has already plunged 30% this year, MUFG Bank said the currency could fall even further.
“We remain firmly directionally bearish on the Lira given the central bank’s resolute dovish bias and tolerance for continued currency depreciation,” said Ehsan Khoman, head of emerging markets research EMEA at the bank.
The central bank is expected to cut rates by 100 basis points to 15%, according to a Reuters poll. It slashed rates by 200 basis points in its October meeting.
It said that recent inflation was due to “transitory factors,” but acknowledged rising prices leave limited room for further rate cuts.
If the central bank eases policy again, there may be more dollarization, additional weakness in the lira and further inflationary pressures, MUFG’s Khoman said.
“We view the current policy mix as unsustainable and rates will need to rise in 2022 to anchor expectations, foster price stability and stabilize the Lira,” he said, noting that inflation is running close to 20%, or four times the official target.
– CNBC