Reuters. File photo: A money changer holds Turkish Lira banknotes at a currency exchange office in Ankara, Turkey, on September 27, 2021. REUTERS / Cagla Gurdogan
By Darren Butler
ISTANBUL (Reuters) – The Turkish lira weakened to a record low of 9.85 against the dollar on Monday when President Tayyip Erdogan said over the weekend that he had ordered the expulsion of ambassadors to the United States and nine Western countries.
Erdogan will preside over the cabinet meeting at 3pm (1200 GMT) and the discussion focused on whether there would be any development on the ambassador issue. Usually the President issues a statement later, around 1600 GMT.
Separately, Turkey’s state-owned banks were expected on Monday to cut borrowing costs by about 200 basis points, according to three people with knowledge of the plan after the central bank cut rates last week.
The lira was trading at 9.8 against the U.S. currency at 0651 GMT, and bankers blamed early weakness for Erdogan’s remarks on Saturday. The lira, which has fallen 24% so far this year, closed at 9.5950 on Friday.
The currency reached record lows last week after the Turkish Central Bank (CBRT) cut 200 basis points in a tragic move ridiculed as reckless by economists and opposition lawmakers, despite rising inflation.
“The central bank is clearly signaling that growth takes precedence over inflation,” said Win Thin at Brown Brothers Harriman.
He said another rate cut is likely at the next policy meeting on November 18, although inflation is set to accelerate due to the fall in the value of the lira and the rise in electricity prices.
“On top of the deteriorating situation, tensions with the West could escalate after President Erdogan says the ambassadors of ten countries will no longer be welcomed in Turkey,” Thin added.
As sales continue, the Turkish lira has climbed the implied volatility measure, reaching one-week, one-month and three-month highs in almost six months.
Erdogan said on Saturday that he had asked his foreign ministry to expel ambassadors demanding the release of businessman and social activist Osman Kavala, who has been in prison for four years without being convicted.
As of Monday morning, there was no sign that the foreign ministry had not yet complied with the president’s directive, which would open the deepest rift with the West in Erdogan’s 19-year rule.
“I’m worried … for the Turkish financial markets on Monday. The lira will inevitably come under extreme selling pressure,” said Tim Ash, a veteran emerging market observer at BlueBe.
“And we all know that (Central Bank Governor Sahap) has no order to raise the rate of Kavsioglu, so the only defense will be to spend foreign exchange reserves that the CBRT does not have.”
Erdogan’s political opponents said his call for the expulsion of ambassadors was an attempt to divert attention from Turkey’s economic woes, while diplomats hoped the expulsions could still be avoided.
The expected rate cuts for the big three state banks were corporate, personal and mortgage loans, Reuters quoted sources familiar with the plan as saying on Sunday.
Semil Ertem, chief adviser to the Turkish presidency and a member of the Vakif Bank board, said on Twitter (NYSE 🙂 that state-owned banks had reduced lending rates at the central bank’s policy rate.
Analysts say such a move could support some borrowers but increase pressure on the lira and the economy, as Turkish benchmark bond yields have risen since the central bank cut rates last week.