(Bloomberg) – Turkish policymakers failed to stem the lira’s free fall with their third intervention this month as the currency quickly resumed losses amid an interest rate policy that markets view as too loose.
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On Friday, the Monetary Authority said it had sold off foreign currencies due to “unhealthy” price formations, echoing President Recep Tayyip Erdogan’s words to describe the recent unrest. While the lira rebounded briefly, it fell to nearly 14 lira to the dollar, close to the levels that triggered all three interventions.
The currency has fallen 38 percent since late September when the central bank cut borrowing costs, bowing to Erdogan’s unorthodox belief that high rates are fueling inflation and should be avoided. Meanwhile, inflation rose to more than 21% in November, reaching its highest level in three years. Deep negative real returns on the currency scare investors.
Peter Matisse, analyst at InTouch Capital Markets Ltd.
The central bank has cut its benchmark interest rate by 400 basis points this year, to 15%. Policy makers will meet on December 16, when markets anticipate a rate cut back to 14%. The concern comes after Erdogan doubled down on his opposition to rising prices and blamed the market for the turmoil.
While he emphasized that a weaker lira could boost Turkey’s competitiveness, the central bank’s action indicates that the authorities want to stem the currency’s slide to reduce its impact on inflation and consumer demand.
The lira fell 1.1% to 13.9436 per dollar as of 4:32 pm in Istanbul, after reaching a low of 13.9548 and a high of 13.7396. Turkish stocks also fell, with the Istanbul Stock Exchange Banking Index losing as much as 2.8%.
(prices for updates)
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