Turkish lira falls sharply, emergency meeting called

The Turkish lira has fallen steeply against the dollar and euro today, triggering a call for an emergency meeting of the country’s central bank’s policy committee for tomorrow (Tuesday).

The Central Bank of the Republic of Turkey (Türkiye Cumhuriyet Merkez Bankası) announced it will “discuss today’s developments and take the necessary policy measures for price stability” at the upcoming meeting.

This will be the first emergency meeting since 2011, when the central bank reduced its main policy rate from 6.25% to 5.75%.

Turkey’s central bank is under growing pressure to raise interest rates, something it is not keen to do for fear of slowing down the economy before local elections in eight weeks’ time.

Turkish lira rebounded on news of upcoming meeting

After announcing that it will take measures if needed, the lira recovered slightly to 2.3420 against the dollar, after falling to a record low of 2.39 earlier on. The lira slid half-a-percent against the euro to 3.17740.

A week ago at its rate-setting meeting the central bank had said it would keep interest rates steady.

The Wall Street Journal quoted Tim Ash, an emerging markets economist at Standard Bank in London, who said (regarding Turkey’s central bank) “They have to hike, and aggressively.” If they fail to announce a significant interest increase, Ash believes it could spark a broad sell-off.

The central bank intervened directly in the currency market last week for the first time in two years, in an attempt to prevent the lira from falling.

After growing by 3.6% in 2013, the Turkish government predicts GDP (gross domestic product) growth of 4% for 2014, compared to 2010/2011’s 8% annual growth.

A probe into corruption in the public sector involving the construction industry has affected Turkish markets. The investigation, which became public last month, has prompted a cabinet reshuffle and the resignation of three ministers.

Turkey sensitive to Fed tapering

Turkey, along with Spain, Brazil, Indonesia, Poland and South Africa, is seen by economists as a country that will suffer as a result of the Fed’s quantitative easing (scaling back on its stimulus program).

As the US Federal Reserve (Fed) reduces the size of the program, which it did in December from $85 billion to $75 billion per month, investors start pulling out of emerging markets, causing stocks and currencies in those countries to fall.

The Fed meets this week; most economists expect it to announce another reduction, possibly to $65 billion per month.

Erdogan needs growth before March elections

Turkey’s Prime Minister, Tayyip Erdogan, is desperately trying to keep economic growth going before March’s local elections.

He has been a vocal opponent of higher interest rates, making it extremely difficult for the central bank to prevent the lira’s slide.

In an interview with Reuters, Luis Costa, head of CEEMEA strategy at Citi, said:

“We think this is the reason why it took the central bank so much time to react. They probably made sure a more aggressive reaction is sanctioned by Erdogan. We think they are close to throwing in the towel.”