The Turkish lira has suffered a fresh sell-off after briefly rallying against the dollar from record lows when the country’s central bank moved to tighten liquidity.
The US dollar rose against the lira on Friday by over 1.5 per cent to over 3.8272 Turkish lira. The dollar had strengthened to record highs of 3.9415 Turkish lira on Thursday.
The central bank moved to limit borrowing to local banks by raising the interest rate on one-week borrowing, as Bloomberg first reported.
Markets have been clamouring for an interest rate rise, but Turkish President Recep Tayyip Erdogan has been a prominent opponent of raising borrowing costs. The lira has been driven down by instability, including a terrorist attack at the start of the year in Istanbul.
However, Erdogan on Thursday urged the central bank to “thwart these games” – supposedly by Turkey’s enemies – and compared currency traders to the soldiers who attempted a coup in July, using foreign exchange as a “weapon”, according to Reuters.
The powerful President’s interventions in monetary policy have so far prevented the central bank from raising interest rates. The Erdogan previously drew ridicule from observers outside his country when he urged Turks to sell foreign currency to help prop up the lira.
Inflation in Turkey soared in December to 8.53 per cent from seven per cent the month before. Higher rates are the textbook central bank response to rises in inflation.
Ipek Ozkardeskaya, senior market analyst at London Capital Group, said: “The sharp liquidity tightening revived speculations that the Central Bank would finally act on rates. The unusual, and somehow discrete intervention eased the selling pressures on the lira and triggered a rally in the Turkish assets.”