Turkish Lira Tumbles After Central Bank Decisions

By Yeliz Candemir in Istanbul and Chiara Albanese in London 

        Turkey's lira sank to record lows on Tuesday as the central bank's interest-rates decision and plan to simplify its monetary policy failed to stem deteriorating confidence in the Turkish economy.
        The central bank's moves come amid mounting security threats as Turkey fights a two-front war and collapsing coalition talks that stoke the likelihood of early elections, threatening to further destabilize the country.
        Members of the bank's Monetary Policy Committee in Ankara said they kept the benchmark one-week repo rate at 7.5% and left the interest-rate corridor unchanged, ranging from the overnight borrowing rate of 7.25% to the 10.75% overnight lending rate.
        "Taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the committee decided to implement a tighter liquidity policy as long as deemed necessary," the central bank said, adding that the lira's weakness is creating inflationary pressure.
        Shortly after the bank's regular monthly meeting, Governor Erdem Basci unveiled a long-awaited, multipronged road map to simplify his monetary stance by moving toward a single policy rate.
        Policy makers said the plan will also help combat currency volatility and safeguard liquidity, highlighting the challenges facing Turkey's economy as the U.S. Federal Reserve's looming interest-rate increase threatens to drain cash from emerging markets that heavily rely on foreign funding.
        While Turkey's interest-rates decision was in line with eight of the 12 economists' forecasts in a Wall Street Journal survey, the central bank's vaguely stated plan to shift to an orthodox monetary stance fell short of market expectations, fueling the lira rout.
        "The central bank of Turkey is making things more toxic, as portfolio bond flows will probably dry up even more," said Luis Costa, emerging-market currency strategist with Citigroup Inc. in London.
        Turkey's lira, this year's worst-performing emerging-market currency except Brazil's real, plummeted by more than 1% to a fresh record low of 2.9066 a dollar and to a new all-time low of 3.2098 a euro after the central bank statements.
        Stocks also took a beating, with the BIST-100 index slumping by 1.25% after trading flat earlier Tuesday. Meanwhile, the government's borrowing costs jumped as benchmark two-year bond yields rose to 10.68% from 10.28%. Bond yields rise as prices drop.
        "Clearly a case of too little, too late," said Tim Ash, an emerging markets economist at Nomura. "The hope was that the central bank of Turkey would get ahead of the curve either with a pre-emptive tightening, or much more hawkish commentary. This does not appear to have been enough."
        Late Tuesday afternoon, the central bank said it would also raise the cap on additional daily currency auctions to $70 million from $30 million, citing "excessive volatility" in exchange rates. The move signals yet another attempt by Mr. Basci to fight lira weakness and financial instability through liquidity interventions instead of interest-rate increases, which would further hamper Turkey's slowing economy.
        As part of its effort to simplify a complex set of policy tools, Turkish policy makers said they plan to use the benchmark one-week repo rate as an anchor and narrow their interest-rate corridor toward a single rate. The central bank will also boost dollar liquidity to help private borrowers meet foreign debt requirements.
        "The lira will remain vulnerable as long as the central bank refrains from providing the battered currency with concrete support," said Rabobank analyst Piotr Matys.
        The central bank's moves follow the failure on Monday of the long-ruling Justice and Development Party's last-ditch effort to form a coalition or minority government.
        Prime Minister Ahmet Davutoglu, who leads an interim government and was tasked with forming Turkey's next administration after elections on June 7 delivered a hung parliament, is poised to give up his mandate to form a government on Tuesday.
        President Recep Tayyip Erdogan is widely expected to call early elections if the Ankara parliament can't form a coalition by Sunday, the constitutionally mandated deadline.
        Meanwhile, Turkey's southeast has been rocked by a series of attacks since last month, including a suicide bombing that killed at least 34 people on the Syrian border, assassinations of policemen and daily clashes between Turkish security forces and Kurdish separatists.
        "Disappointment from politics with no coalition formed yet, and from the central bank with no simplification of the policy framework, is not great," said Viktor Szabo, who helps oversee $483.3 billion of emerging market debt at Aberdeen Asset Management in London. "There seems to be little demand to add Turkish risk, as we are now facing another two-to-three months of political uncertainty."
        Write to Yeliz Candemir at yeliz.candemir@wsj.com and Chiara Albanese at chiara.albanese@wsj.com
        (END) Dow Jones Newswires

        August 18, 2015 17:06 ET (21:06 GMT)