Turkish lira expected to fall sharply after ‘major policy mistake’: report

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A teller holds Turkish lira banknotes at a currency exchange office in Istanbul on August 13, 2018. Turkey's troubled lira tumbled on August 13 to fresh record lows against the euro and dollar, piling pressure on stock markets on fears the country's crisis could spill over into the world economy. / AFP PHOTO / Yasin AKGUL

The Turkish lira is expected to fall sharply in the coming months because the central bank is failing to target inflation, the Ahval news website reported, citing Germany’s Commerzbank.

A decision by the central bank on Thursday to leave the benchmark rate unchanged at 24 percent when inflation is running at 24.5 percent shows policymakers are “taking the path of least resistance,” Commerzbank’s Tatha Ghose said, according to FX Street.

The lira had stabilized when the bank hiked rates by 625 basis points in September in response to a spike in inflation. Many economists had expected policymakers to raise rates again but conceded that political considerations – President Recep Tayyip Erdoğan’s opposition to higher interest rates and slowing economic activity – lessened that possibility.

“At the slightest feeling of comfort with lira developments the central bank has decided to pause the hiking cycle,” Ghose said. “We therefore see USD-TRY rising sharply in coming months and disrupting the status quo.

“In our view, this was a major policy mistake. The central bank commented that it maintains a tight policy stance. But, when the benchmark rate is 24 percent and inflation is also 24 percent how is this stance ‘tight’?”

The lira has lost more than a third of its value against the dollar this year after the central bank responded belatedly to currency weakness and investor worry that the economy was overheating. The lira reached a record low of 7.22 to the dollar in August, when concerns were exacerbated by a political crisis with the United States. Tensions with Washington abated after a Turkish court finally released American pastor Andrew Brunson.

The lira was little changed at 5.63 to the dollar at 10:13 a.m. in Istanbul on Friday.

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