Turkish lira nears record low after minister shrugs off volatility

ISTANBUL: The Turkish lira drifted towards its record low on Thursday after Finance Minister Berat Albayrak downplayed the currency's volatility and emphasized its competitiveness, and as the central bank continued to raise backdoor borrowing costs.

Turks have flocked to hard currencies in recent weeks and analysts have called for more decisive measures such as a formal tightening of monetary policy to stabilize markets and head off deeper economic problems.

The lira weakened slightly to 7.3400 by 0930 GMT. It hit a record low of 7.3650 on Friday, sliding 19pc against the US currency this year to make it one of the worst performers in emerging markets (EMs).

"The current policy mix is unsustainable and it is exasperating economic imbalances," said Pramol Dhawan, head of EM portfolio management at California-based Pimco.

Albayrak told broadcaster CNN Turk on Wednesday evening that the lira will go "down and up" and said competitiveness was more important than the FX level. He said the economy could contract as much as 2pc this year.

"I think what we have seen is an admission that the hard defence of the lira around the 6.85 level - which I think aimed at sending a message of stability so as to stem dollarisation - failed," said Bluebay Asset Management's Timothy Ash.

In response to the volatility, the central bank has halted cheap credit lines and on Thursday it funded the market at a simple rate of 10.96pc via a 20 billion lira repo that used traditional bids, in a further sign of tightening.

Bankers said some banks had begun charging a fee to withdraw hard currency cash.

Yet expectations have grown that the central bank will ultimately raise its 8.25pc policy rate to boost confidence amid concerns over depleted reserves, costly state FX interventions and a trend of Turks buying foreign currencies.

Pimco's Dhawan said the problem was a scarcity of dollars.

"The fear is if the dollars start to leave the banking system, to be moved outside of the country or get parked in hard assets, the central bank is unable to utilize those dollars to control the currency," Dhawan said.