Turkish lira volatile, central bank moves to help firms on foreign debt

The central bank, which raised its top interest rate by three percentage points to 16.5 percent on Wednesday, followed up on Friday with a move to help companies repay some foreign currency debt, according to Reuters.

Turkey’s currency has fallen about 20 percent this year, with ratings agency Fitch warning that the sharp decline could put pressure on the many Turkish firms that borrow money in foreign currencies. The lira, which hit a record low of 4.9290 just before Wednesday's rate rise, was trading at 4.7049 to the dollar at 1654 GMT on Friday, little changed from the previous day's close.

However, it had weakened as much as two per cent in early trade before recovering, helped partly by the central bank which said it would allow some foreign currency debt to be repaid at fixed lira rates, Reuters said.

President Tayyip Erdogan, a self-proclaimed “enemy of interest rates” who faces elections on 24 June, wants lower borrowing costs to fuel credit growth and economic expansion. He on Turks on Saturday to convert their dollar and euro savings into lira, as he seeks to bolster the ailing currency.

According to Reuters investors, already wary that the economy is overheating and want substantial rate increases to tame inflation, were particularly unnerved by comments from Erdogan last week that he would look to take greater control over monetary policy after the elections.

Deputy Prime Minister Mehmet Simsek, a former Wall Street banker, tried on Friday to soothe such worries, saying the worries investors might have are understandable, but said that necessary steps to address the concerns have been and would continue to be taken. He added that the central bank showed that it is independent and it would do whatever is necessary when it is necessary.

The lira has had its worst week and month in almost nine years and further weakness ahead are predicted which could push authorities to do more to turn the tide. The central bank is due to have its next policy-setting meeting on 7 June.

Erdogan discussed about the need for fiscal discipline and stability in an effort to placate investors after Wednesday’s rate rise, but he also said the lira’s volatility did not reflect economic realities and he would not allow “global governance types” to ruin the country.

Friday’s central bank move, designed to ease the debt burden on companies, affects about $3.5 billion of loan repayments, bankers said according to Reuters.