Early rate cut scenario sends lira to all-time low
The Turkish lira weakened to as low as 2.4188 against the US dollar, an all-time low, on Thursday due to expectations that the Central Bank will cut interest rates at an extraordinary Monetary Policy Committee (PPK) meeting to be held as early as next week.

The lira fell for the fifth day in a row on Thursday, losing as much as 1.4 percent against the US dollar. The greenback's recent rally against the lira started on Jan. 27, after the Central Bank of Turkey Governor Erdem Başçı signaled a rate cut on Feb. 4, one day ahead of the reporting of the official inflation figures for January. The main share index, Borsa İstanbul (BIST), fell 1.42 percent to 89.062 points, underperforming against the broader emerging market index that was down more than 1 percent on Wednesday. The benchmark 10-year government bond yield rose to 7.07 percent from 6.99 percent on Wednesday.

The lira's losses after Başçı's comments suggest a lack of conviction about lower inflation and a significantly narrower current account deficit. Turkey's high external debt and the prospect of higher Federal Reserve (Fed) rates later this year are also big blows to the lira, observers said earlier. The lira has also been hit by the Fed's upbeat view of the US economy and signal that it remains on track to raise interest rates this year -- weakened from 2.3780 late on Wednesday and nearing its record low of 2.4140. It stood at 2.4045 by the end of Thursday.

Başçı said on Tuesday that the bank may hold an early monetary policy meeting next week and discuss an interest rate cut if inflation continues to fall sharply.

The Central Bank opened a one-week, fixed-rate repo auction on Thursday with a volume of TL 16 billion ($6.7 billion), the bank's data showed.
Political pressure

Başçı, under pressure from the government to lower rates ahead of a June parliamentary election, said the bank could act as early as Feb. 4 if data, due a day earlier, showed inflation in January slowing by more than one percentage point. The lira weakened to 2.36 against the dollar after his comments, reversing earlier gains on Tuesday.

Prime Minister Ahmet Davutoğlu joined other politicians clamoring for an early interest rate cut by the Central Bank on Wednesday, intensifying long-standing pressure on the bank. President Recep Tayyip Erdoğan, a vociferous advocate of lower rates, kept up the pressure on Tuesday, reiterating his assertion that high interest rates cause high inflation. "Look at the world's developed countries. There are no rate policies like ours. In Japan interest rates are low and inflation very low. If we want investment, we must achieve this," he said.

In a Reuters poll on Wednesday, all 15 economists who responded said they expect the bank to hold an unscheduled meeting after the inflation data is released on Feb. 3. They expect it to cut its main interest rate by 50-75 basis points.

"As the USD/TRY (dollar/lira) broke above the 2.37 resistance level, we think this opens room for a move towards 2.41, especially if the Central Bank eases (its) liquidity stance or cuts the upper bound of the interest rate corridor as well next week," Erkin Işık, a strategist at TEB-BNP Paribas, said in a note.

“The suspicion is that the Central Bank is under a lot of political pressure to cut interest rates. … It's never a good thing if politicians are seen to have undue influence on monetary policy,” Henrik Gullberg, a London-based, foreign exchange strategist at Deutsche Bank AG, was quoted as saying by Bloomberg on Thursday.

Early rate cut scenario sends lira to all-time low

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