ISTANBUL--Turkey's central bank verbally intervened to stem the
lira's slide as the currency hit record lows against the dollar
Friday, seeking to ease fears that policy makers may prematurely
cut interest rates despite a broad emerging-markets selloff.
Amid sustained pressure on Turkey's currency Friday afternoon,
the central bank said it would "use all policy instruments at its
disposal" toward meeting inflation targets, hinting that currency
volatility may derail anticipated interest-rate reductions.
"Recent movements in financial markets are not consistent with
the degree of caution of the rate cut cycle envisaged by the
Central Bank of the Republic of Turkey," policy makers said in a
statement shortly before local markets closed.
After the Turkish central bank's statement, the lira pared
losses to as little as 0.5% against both the dollar and the euro.
But the impact was short-lived, with the lira 1% weaker against the
greenback and down 0.9% versus the euro after markets closed in
Istanbul. Meanwhile, benchmark two-year bond yields rose to 6.89%
from 6.8% before the statement.
The intervention came after a 1.3% drop in the lira to 2.4471 a
dollar on Friday, after a surprise rate cut by the Russian central
bank and contagion fears sent the broadly flat Turkish currency
tumbling to yet another all-time low for a second consecutive
day.
The lira also continued its free fall against the euro,
weakening by as much as 1.2% to 2.7699 a euro to its lowest in
three weeks despite the common currency's decline following the
European Central Bank's monetary-easing decision last week.
Turkish central bank Governor Erdem Basci's suggestion on
Tuesday that policy makers may convene an emergency meeting on Feb.
4 to cut interest rates has been fueling the lira selloff, now in
its sixth day. While some analysts interpreted the central bank's
Friday statement as a sign that the governor wouldn't convene an
extraordinary meeting, the communique and a central bank spokesman
didn't explicitly rule out the option.
"We were quite doubtful about the viability of the meeting,
having seen the sharp depreciation in the currency; although we
were thinking that political pressure may urge the central bank of
Turkey to go for it," said Ozlem Derici, chief economist at Deniz
Invest in Istanbul. "It seems that the central bank will wait for
the original date of the meeting on February 24th and follow market
conditions to better assess whether it is the right time to ease
monetary policy."
The lira's slide started in early December, amid signs that the
economic recovery in the U.S. would prompt the Federal Reserve to
start raising interest rates in a move that threatens to suck money
out of emerging markets like Turkey. The sell-off accelerated in
mid-January, driven by mounting political pressure on Turkey's
central bank to cut interest rates. The lira has slumped 4.4%
against the greenback since the beginning of this year and lost
nearly 4% since Tuesday.
The government and President Recep Tayyip Erdogan have been
pressuring the central bank daily for the past month, saying
significant cuts to borrowing costs are needed to stimulate growth
in Turkey's slowing $820 billion economy.
"Recently signaled emergency rate cuts were anyway beginning
to--mildly--pressure the currency," said Tatha Ghose and Simon
Quijano-Evans, London-based Commerzbank AG analysts. "The situation
worsened because of a general risk-off tone around the region,
perhaps driven by concern surrounding Russia."
Mr. Basci said this week that Turkey's inflation rate is poised
to slow rapidly in January, justifying reductions to interest
rates. Consumer-prices will increase by an annualized 6.8% in
January, according to a survey of seven economists by The Wall
Street Journal, down from 8.17% in December.
Before Friday's verbal intervention, many economists--including
from J.P. Morgan Chase & Co. and Citigroup Inc.--had said the
central bank is on track to cut its policy rate to 7% from 7.75%
next week. Mr. Basci had said policy makers may hold an
extraordinary meeting to reduce borrowing costs Wednesday if
official data Tuesday shows that inflation slowed by more than 1
percentage point in January.
A fresh drop in one-week repo rate would mark the second
reduction following a 0.5 percentage point decrease from 8.25% on
Jan. 20, when Mr. Basci resumed a monetary policy easing cycle he
had halted for five months.
Some government ministers and the president slammed the last
decision as "insufficient" to incentivize investments and support
tepid economic growth--about 3% last year. On Friday, Economy
Minister Nihat Zeybekci dismissed concerns about the lira's free
fall, saying currency depreciation should not stand in the way of
lower interest rates.
"At the present juncture, interest-rate reductions are already
late," Mr. Zeybekci said as the lira slumped to fresh lows against
the dollar. "We find it meaningless for Turkey to tolerate high
interest rates by acting with apprehension."
Emerging-market currencies came under renewed pressure after
Russia's central bank reduced its one-week repo rate to 15% from
17%, surprising markets and causing investors to shun risky
assets--including Turkey's currency.
"The lira will remain vulnerable as long as investors perceive
that the central bank is submitting to political pressure to cut
rates," said Paul McNamara, an emerging-markets bond investor who
oversees about $5 billion at GAM, an asset-management firm. "With
significant, mostly private foreign debt, loose monetary
policy--especially anything that makes effective interest rates
close to inflation--poses a significant risk to the currency."
Write to Yeliz Candemir at yeliz.candemir@wsj.com
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