A merchant counts Turkish Lira banknotes at the Grand Bazaar in Istanbul, Turkey on March 29, 2019. REUTERS / Murad Sezer / File Photo

ISTANBUL, Dec. 13 (Reuters) – The Turkish lira slumped as much as 7% to a record high of nearly 15 per dollar on Monday before retreating after the central bank intervened, gripped by concerns over the President Tayyip Erdogan’s new policy and risky economic outlook for another rate cut.

The central bank said it entered the market to sell dollars for the fourth time in two weeks, triggering the rebound after the currency hit 14.99 – where it was only worth half of its value in the past. beginning of the year. Read more

The bank decided to keep the lira below 14 last week, but dropped that level on Monday. The depreciation is fueling inflation in the large emerging market economy which relies heavily on imports, and which is shaken after 400 basis points of interest rate cuts since September. Read more

The interventions constitute an additional risk for a central bank which not only relaxes its policy in the face of rising inflation, but which has also depleted its foreign exchange reserves.

According to calculations by bankers analyzing official data, the central bank sold $ 1.5 billion to $ 2 billion on Monday alone, after sales worth $ 2.5 billion in the first three efforts.

As of 3:47 p.m. GMT, the pound had reduced losses in trading in a tight market to 13.79 – its strongest point of the day, but still down 31% since the start of last month.

“The central bank has continued to intervene to soften the blow, but it is like putting a band-aid on a gaping wound,” said Win Thin, global head of monetary strategy at Brown Brothers Harriman.

In response to the market turbulence – which has shaken the economic life of Turks – Erdogan spoke with central bank governor Sahap Kavcioglu, finance minister Nureddin Nebati and heads of state banks in Istanbul, said sources at Reuters. Read more

The decisions of the meeting were not clear and no announcement had been made.

REVISED TO NEGATIVE OUTLOOK

The central bank, under pressure from Erdogan, is expected to cut its key rate by 100 basis points to 14% this week, a Reuters poll found on Friday, despite inflation soaring to 21.3% last month. Read more

Kavcioglu said increasing the current account, which posted a surplus of $ 3.156 billion in October, was the key to price stability and the pound. But many analysts are skeptical. Read more

“We doubt that an intervention or a balanced current account will be effective in stabilizing the currency,” Morgan Stanley said in a note.

The central bank’s relatively thin reserves mean interventions could be counterproductive, he added.

Data last week showed the central bank’s net international reserves fell to $ 22.47 billion. The reserves are strongly negative after deducting the outstanding swap transactions of $ 45.571 billion. Read more

Turkey’s dollar sovereign bonds fell, the 2034 issuance down 0.8 cents, according to Tradeweb data.

The pound crash has severely eroded Turkish incomes, fueling poverty and leading to queues of people waiting to buy cheap bread as the price of goods rises. Lawmakers scuffled amid mounting tensions in parliament as the opposition criticized the government’s stewardship of the economy. Read more

On Friday evening, the S&P rating agency confirmed Turkey’s long-term foreign currency rating at “B +” and revised its outlook to negative due to uncertain policy and increased external risks.

Turkey’s 5-year credit default swaps (CDS) rose 1 basis point to a one-week high of 503 basis points, according to data from IHS Markit.

Erdogan has repeatedly advocated for rate cuts as he promotes a new economic plan that prioritizes economic growth, credit, production and exports, despite widespread criticism of the policy from economists and opposition politicians.

“There is an element of concern as to what the economic plan is and how closely it would relate to engaging with the private sector. There is a lack of clarity on that,” Khush said. Choksy, US House Senior Vice President for International Affairs. development and for the Middle East and Turkey.

“US businesses are wondering how Turkey will handle the current crisis in the near term and embark on the long-term growth path it has known for a long time,” Reuters told Reuters.

Additional reporting by Nevzat Devranoglu, Karin Strohecker and Marc Jones; Written by Daren Butler; Editing by Kirsten Donovan and Alison Williams

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