By Barbara Kollmeyer
The Turkish lira sunk to new depths against the U.S. dollar on Wednesday after more rhetoric about monetary policy from the country’s leader and as investors waited for a central bank meeting due Thursday.
Markets zeroed in on comments from President Tayyip Erdogan ahead of Thursday’s central bank policy meeting. “We will lift this scourge of interest rates from people’s backs. We certainly cannot allow our people to be crushed by interest rates,” he said, while addressing lawmakers from his ruling conservative AK Party in parliament, according to Reuters .
The lira has come under intense pressure this year as the Turkish central bank, under pressure from Erdogan who has fired several central bank chiefs, lowered official interest rates by 3 percentage points since September, despite soaring inflation. While the government claims inflation is hovering at 20%, an independent group of academics and former government officials says it’s closer to 50%, as prices grow unbearably high for consumers .
“Despite surging inflation (currently above 20%) and the ongoing currency crisis in the country, the Turkish Central Bank, under the heavy influence of the country’s President Erdogan, has been cutting interest rates to tackle these issues, which makes about zero economic sense,” said Victor Argonov, senior analyst at WealthTech EXANTE, in a note to clients.
“Yet, Erdogan insists on his long-held view that high levels of interest rates are the cause of the problem and they need to be slashed. So, economists are forced to expect a rate cut at the conclusion of CBRT’s meeting on Thursday, to the tune of 100 basis points to 15% from 16% currently,” said the analyst.
Down 10% against the U.S. dollar /zigman2/quotes/210561895/realtime/sampled USDTRY +0.0006% this month, the lira was currently changing hands at a new all-time low of 10.598, and it’s also the cheapest in the world, as laid out by this Deutsche Bank chart:
“Our preferred DBeer metric continues to indicate extreme undervaluation in TRY and ex-MXN LatAm FX. We remain bearish on TRY despite real undervaluation however, as inflation pressures outpace nominal yields with the central bank set to cut rates again”, said a team of Deutsche Bank analysts led by Shreyas Gopal.
The Turkish lira has dropped 40% against the dollar this year and 30% against the euro, noted Fawad Razaqzada, market analyst at ThinkMarkets. In a note to clients, he cautioned investors to be wary of “contagion risks” from the slide in the lira, “particularly for currencies of oil-importing nations such as India where the Rupee has already been weakening.”
Elsewhere, the Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP +0.16% rose 0.1% to 490.13, which though modest, would still mark a new closing high if it holds. The German DAX /zigman2/quotes/210597999/delayed DX:DAX +0.74% gaining 0.1%, the French CAC 40 /zigman2/quotes/210597958/delayed FR:PX1 +0.14% up 0.% and the U.K. FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +0.47% down 0.3%.
The biggest Stoxx gainer was Sage /zigman2/quotes/204528931/delayed UK:SGE -0.81% , which rose 9% after reporting in-line revenue growth and operating margin, but an upbeat outlook from management for 2022 from the enterprise software group.
The biggest InPost /zigman2/quotes/224214207/delayed NL:INPST +1.81% , which fell 13%, after the parcel locker company revised down its outlook in results reported on Wednesday.