Turkish lira hits record low, losing 2% amid concerns of smaller rate increase

The Turkish lira tumbled to a record low on Tuesday, losing more than 2% of its value against the dollar amid market concerns that the central bank might raise interest rates this week by less than previously expected. 

As of 4:15 p.m. Istanbul time, the lira was 26.99 against the dollar, 2.4% less than Monday’s close of 26.3505. 

The currency has weakened by more than 30% this year amid high inflation and moves to increase interest rates to highs, making the second-largest devaluation against the dollar after the Argentine peso. 

Turkey’s central bank is expected to raise its policy rate by 500 basis points to 20% this week to further curb inflation, according to a poll by Reuters.

The current rate, which was last hiked up 6.5 percentage points on June 22, stands at 15%. The increases in interest rates mark a U-turn from President Recep Tayyip Erdogan’s unorthodox economic policy of keeping interest rates low, even as inflation rises.

Bloomberg reported that state-run banks, which have frequently sold dollars to prop up the lira in periods of turbulence, have not been doing so recently, citing traders who remained anonymous. 

After Erdogan held onto power after a decisive general election in May, he appointed a new central bank governor, Hafize Gaye Erkan, and a new treasury and finance minister, Mehmet Simsek, in a bid to regain investor confidence and revive the flow of international investment to ease Turkey’s foreign exchange crunch.

Erdogan is visiting the Gulf countries this week in a bid to secure funding to help Turkey’s ailing economy. He arrived in Jeddah, Saudi Arabia on Monday, where he met with Saudi King Salman bin Abdul Aziz Al Saud and Crown Prince Mohammed bin Salman as well as other Saudi officials.