The value of Turkey's currency against the U.S. dollar fell to its lowest this week. In spite of intervention by state banks and the government the lira still continues to depreciate.
The currency fell further Friday - opening at 7.3438 against the U.S. unit after falling as much as 3.2 percent to 7.2775 Thursday. As a consequence, the cost of insuring the country's bonds against a possible default rose to its highest in three months.
Analysts at Goldman Sachs and Oxford Economics said an immediate rate rise may be inevitable. However, others think Turkey will go a different way. Societe Generale in London said there may be more tolerance for currency volatility than most have anticipated.
The main factors hurting the currency are growing concerns over the nation's reserves and significant outflows of foreign capital following a series of interest-rate cuts. In an attempt to control the fall Turkey turned to state banks to find ways of increasing foreign-currency sales. Authorities said increasing interest rates or decreasing the supply of credit will be a last resort.
Since July the country's central bank has reduced interest rates by 1,575 basis points in nine interventions. This drove borrowing costs adjusted for inflation into the negative for the first time. Turkey injected billions of dollars in liquidity into its markets to promote economic activity.
Before resorting to raising interest rates Turkey plans to implement other measures to strengthen its currency. These include imposing limits on U.S. dollar purchases in the country. Officials may raise taxes on foreign-currency purchases to mitigate further capital outflows, sources with knowledge of the matter said.
Turkey will unlikely resort to raising interest rates in the short-term because that would be an admission its interventions have failed, analysts at Rabobank in London said. The head of Turkey's central bank, Murat Uysal, has largely stuck with his claim that interest-rate cuts are doing well to lift the country out of recession. Uysal was appointed head of the central bank by President Recep Tayyip Erdogan to solve the currency crisis.
