ISTANBUL: Turkey’s lira weakened for a third day yesterday after its central bank governor sounded sanguine on the outlook for the hard-pressed currency and reiterated his commitment not to raise rates to support it.
Governor Erdem Basci also said on Tuesday he expected the lira to recover and that markets had already priced in a tapering of the US Federal Reserve’s bond buying programme — suggesting he believed pressure from an associated shift in capital out of emerging markets should now ease.
But while the Fed’s decision not to cut its bond purchases last week has given Basci some breathing space, some economists doubt the lira’s 15 percent fall since February is at an end, particularly given Turkey’s huge current account deficit.
“This market reaction reflects disappointment with Basci’s reluctance to raise rates permanently to support TRY,” said Manik Narain from UBS, adding that the market fears that central bank is too complacent in its expectations.
The lira was down at 2.0041 against the dollar by 0855 GMT compared with 2.0012 late on Tuesday. The 10-year benchmark bond yield fell slightly to 9.05 percent from 9.1 percent on Tuesday.
On September 4 the central bank said it would start using gross forex reserves — as well as net reserves — to manage the lira but following Basci’s comments, analysts lamented the lack of a clear commitment to tighten policy.
The bank has already spent a fifth of its readily available foreign currency reserves since May to support the lira.
“We agree with Mr Basci that the lira is now fundamentally not overvalued, but at the same time the central bank is unnerving markets by not showing a steady hand in the conduct of monetary policy,” said Lars Christensen from Danske Bank.
“The last two years have a long experience of a zigzagging central bank with no clear target. The Turkish central bank needs to get back to clear and transparent communication about what it is trying to achieve and then it is likely that the lira sooner or later will stabilise again.”
Istanbul’s main share index was down 0.6 percent at 76,074 points, underperforming wider emerging market peers which fell 0.33 percent.