Turkish lira slides nearly 9% after Erdogan stokes firesale

Turkey's lira nose-dived nearly 9% on Tuesday after President Tayyip Erdogan defended recent sharp rate cuts, and vowed to win his "economic war of independence" despite widespread criticism and pleas to reverse course.

The lira tumbled to as low as 12.49 to the dollar, plumbing record troughs for an 11th straight session. It has lost 40% of its value this year, including a near 20% decline since the beginning of last week. It was trading at 12.32 at 1048 GMT.

Erdogan has applied pressure on the central bank to pivot to an aggressive easing cycle that aims, he says, to boost exports, investment and jobs - even as inflation soars to near 20% and the currency depreciation accelerates, eating deeply into Turks' earnings.

Former central bank deputy governor Semih Tumen, who was dismissed by Erdogan last month, called for an immediate return to policies which protect the lira's value.

"This irrational experiment which has no chance of success must be abandoned immediately and we must return to quality policies which protect the Turkish lira's value and the prosperity of the Turkish people," he said on Twitter.

Tuesday's slide was the lira's biggest fall since the previous central bank chief was dismissed in March and its 11 days of losses was its worst run since November 1999. The lira has been by far the worst performer in emerging markets this year due mostly to what analysts call reckless and premature monetary easing.

Against the euro, the currency weakened to a fresh record low of 13.8815 on Tuesday.

The lira tumble comes after a slide in support for Erdogan's ruling AK Party in opinion polls and opposition calls for early elections before those scheduled for 2023. It has also intensified Turks' concerns about the sharply rising cost of living.

"Prices are rising too fast. I don't want to buy certain products because they've got too expensive," said Kaan Acar, 28, a hotel executive in southern Turkey’s Kalkan resort, adding he was thinking of cancelling a trip abroad due to the rising cost.

"The fault lies with President Erdogan, the AKP government, and those who for years turned a blind eye and supported them."

Investors appeared to desert the lira as volatility gauges spiked to the highest levels since March, when Erdogan abruptly sacked the hawkish former central bank chief and installed a new governor, like the president a critic of high rates.

The 10-year benchmark bond yield rose above 21% for the first time since the start of 2019. Turkey's sovereign dollar bonds fell more than 1 cent in early trading, Tradeweb data showed.

As the lira plunged, the main share index rose 1% due to suddenly cheap valuations. However bank stocks dropped, with the banking index down 1.3%.

'EMERGENCY' HIKES?

The central bank cut its policy rate last Thursday by 100 basis points to 15%, well below inflation of nearly 20%, and signaled further easing.

It has slashed rates by a total of 400 points since September, in what analysts have called a dangerous policy mistake given deeply negative real yields, and given that virtually all other central banks have begun tightening, or are preparing to do so.

Erdogan received support on Tuesday from his parliamentary ally, nationalist MHP leader Devlet Bahceli, who said high interest rates limit production and that there was no alternative to a policy which focused on investments.

"Turkey needs to rid itself of the hunchback of interest rates," Bahceli said in a speech to his party in parliament.

Analysts said emergency rate hikes would be needed soon, while speculation about a cabinet overhaul involving the finance minister, Lutfi Elvan, has also weighed.

Erdogan defended the policy late on Monday and said tighter monetary policy would not lower inflation.

"I reject policies that will contract our country, weaken it, condemn our people to unemployment, hunger and poverty," he said after a cabinet meeting, prompting a late-day slide in the lira.

Societe Generale said on Monday the central bank would need to deliver an "emergency" hike as soon as next month and lift the policy rate to about 19% by the end of the first quarter of 2022.

"Risks are skewed for more depreciation," said Guillaume Tresca, senior EM strategist at Generali Insurance Asset Management, adding he expected Turkey's turmoil to have a limited impact on other emerging market countries and assets.

"We do not see value in Turkish assets yet. The main difference from previous market stress episodes is the limited push-back from authorities. There is a clear will for a weaker FX," he added in a note.