A currency exchange in Istanbul, Turkey. Turkey’s lira touched new lows against the dollar and euro on Friday, hamstrung by worries over more interest rate cuts. Image Credit: Bloomberg

Istanbul: Turkey’s lira touched new lows against the dollar and euro on Friday, hamstrung by worries over more interest rate cuts despite high inflation, after President Tayyip Erdogan dismissed three central bank policymakers.

Two of the three monetary policy committee (MPC) members ousted on Thursday were seen to oppose the bank’s 100 basis-point rate cut to 18% last month, and their dismissal clears the way for more policy easing as soon as next week.

A survey by the central bank showed market participants expected the rate to hit 16.6 per cent in three months, representing cuts of 140 basis points, while inflation expectations rose.

The lira, which has weakened more than 19 per cent this year so far, lost some 0.9 per cent on Friday to hit an all-time low of 9.28 against the US currency. It stood at 9.27 at 2103 GMT.

It also touched a record 10.7235 against the euro.

Central bank’s credibility

“These frequent replacements of decision-makers is underlining the message that the central bank is not independent and under enormous political pressures,” said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum and a former US Federal Reserve economist.

She said the lack of credibility made markets nervous because the bank’s inflation goal of 5 per cent% would likely be harder to achieve and also because any future rate hikes would be less effective.

Analysts viewed the latest central bank personnel changes as fresh evidence of political interference by Erdogan, a self-described enemy of interest rates who frequently calls for monetary stimulus.

The bank’s next policy meeting is on Oct. 21.

According to initial results of a Reuters poll, most economists expect a rate cut next week and some may respond to the MPC shakeup by predicting a more aggressive easing.

“We think rate cuts in Turkey are premature at this point, but it has been clear for some time that the president wants the central bank to reduce them further and has the political power to influence this,” said Thomas Clarke, portfolio manager at William Blair Investment Management.

Turkey’s government separately recorded a September budget deficit of 23.59 billion lira compared to a deficit of 29.67 billion lira a year earlier, improving mainly due to rise in tax income.

The main blue chip Borsa Istanbul BIST100 index was flat while banking index was 1.6 per cent% lower.