Turkey’s central bank struggles with lira slide

ISTANBUL/ANKARA: For some of Turkish President Tayyip Erdogan´s aides, the mere suggestion that the central bank should raise interest rates as the lira slides through new record lows amounts to a plot against the state.

"It is clear the goal is to bottleneck the country´s economy," Erdogan´s adviser Bulent Gedikli said on Twitter on Tuesday in response to a statement from the Japan Credit Rating Agency (JCR) indicating investors might welcome a hike.

"It is open to debate how right it is to intervene in a floating-rate system, and if it is to be done, should it be just by hiking rates and destroying growth?" he said, suggesting there were other, better ways.

Less than an hour later, the central bank took the sort of step he seemed to have in mind, cutting banks´ forex reserve requirements in a move it said would inject $1.5 billion into the system in a bid to ease pressure on the lira.

The move won a "thumbs-up" emoji from Gedikli. The currency firmed briefly, but later resumed its slide, in what investors say is a sign that such steps may be unable to stem the decline without an outright rate hike.

The lira has fallen 6.8 percent to the dollar since the start of the year, and has now lost almost a quarter of its value since a failed coup last July. It weakened beyond 4.0 to the euro for the first time on Tuesday.

The spillover from neighbouring Syria´s civil war, bombings by Islamic State and Kurdish militants, the coup attempt, uncertainty over a planned referendum that would hand Erdogan greater powers, and the first quarterly economic contraction in seven years have all taken their toll. Turkey´s large external borrowing requirement also makes the lira one of the currencies most vulnerable to tightening by the U.S. Federal Reserve. But compounding all of these is the sense that Erdogan´s aversion to high interest rates means that the central bank is unable to do the one thing that might stem the rout: hike rates sharply enough.

The bank is unlikely to be able to mount a sustained defence of the lira using its foreign currency reserves; these totalled around $92 billion at the end of last year, but analysts´ calculations suggest usable levels are around a third of that.