The Turkish lira has fallen to its lowest level in almost eight months, prompting the country’s central bank to suspend short-term borrowing of government securities, in what has been dubbed a “backdoor” interest rate rise.
The country’s embattled currency – which has been under pressure since March – has seen a serious severe downturn since Turkey’s election board announced on Monday that it would re-run the Istanbul mayoral election.
On April 17 the main opposition candidate Ekrem Imamoglu won the poll, but the country’s election board has since annulled the result after complaints of corruption. The opposition party said the re-run is due to pressure from President Recep Tayyip Erdogan.
The news raised concerns over the strength of Turkey’s democratic institutions and spooked investors, who sold off lira. The currency had fallen 0.9 per cent shortly after 12.30pm UK time today, meaning $1 bought 6.233 lira, and has dropped 2.7 per cent since Monday.
In response to the lira’s decline the government today suspended a type of short-term borrowing of government securities – the one-week repo auction – that is widely used to raise money over short timescales.
The move has been labelled a backdoor interest rate rise as it forces borrowers to use the higher overnight lending rate, which currently stands at 25.5 per cent. The one-week repo auction rate was 24 per cent.
Turkey’s central bank said the decision to suspend the auctions was due to “the developments in financial markets”.
The government last suspended the one-week repo facility at the end of March, amid fears that a currency crisis of the sort that shook Turkey in 2018 could return in the run-up to local elections.
Read more: Is Turkey's economic crisis contagious?
“A lot of the factors that drove last year's currency crisis simply appear to be rearing their head again,” said Jason Tuvey, senior emerging market economist at Capital Economics. “There's domestic political stuff, there's tensions with the US, there's fresh concerns about policy-making at the central bank.”
“There's probably some political pressure on [Turkey’s central bank], they don't want to resort to outright interest rate hikes, they'd rather do it in a way that they hope will avoid the wrath of President Erdogan,” Tuvey said.