Turkish lira at all-time low 9.85 after Erdogan seeks expulsions

© Reuters. FILE PHOTO: A money changer holds Turkish lira banknotes at a currency exchange office in Ankara, Turkey September 27, 2021. REUTERS/Cagla Gurdogan

By Daren Butler

ISTANBUL (Reuters) -The Turkish lira weakened to a record low of 9.85 against the dollar on Monday after President Tayyip Erdogan said during the weekend he had ordered the expulsion of the ambassadors of the United States and nine other Western countries.

Erdogan will chair a cabinet meeting at 3 p.m. (1200 GMT) and market attention was focused on whether any developments on the envoy issue will emerge from the discussions. Generally the president issues a statement afterwards, around 1600 GMT.

Separately, Turkey's state banks were expected on Monday to cut borrowing costs on loans by around 200 basis points, according to three people with knowledge of the plan, following last week's central bank rate cut.

The lira was trading at 9.8 versus the U.S. currency at 0651 GMT and bankers attributed the early weakness to Erdogan's comments on Saturday. On Friday the lira, which has fallen 24% so far this year, closed at 9.5950.

The currency had hit record lows last week after the Turkish central bank (CBRT) cut its policy rate by 200 basis points, despite rising inflation, in a shock move derided as reckless by economists and opposition lawmakers.

"The central bank is clearly signaling that growth takes precedence over inflation," said Win Thin at Brown Brothers Harriman.

He said another rate-cut is likely at the next policy meeting on Nov. 18, even though inflation is set to accelerate due to the plunging lira and rising energy prices.

"On top of deteriorating fundamentals, tensions with the West are likely to continue rising after President Erdogan said that ambassadors from ten nations were no longer welcome in Turkey," Thin added.

With the selloff continuing, Turkish lira implied volatility gauges climbed, with the one-week, one-month and three-month measures hitting their highest level in around six months.

DIPLOMATIC TENSIONS

Erdogan said on Saturday he had told his foreign ministry to expel the envoys for demanding the release of businessman and philanthropist Osman Kavala, who has been held in prison for four years without being convicted.

By Monday morning, there was no sign that the foreign ministry had yet carried out the president's instruction, which would open the deepest rift with the West in Erdogan's 19 years in power.

"I worry ... for Turkish financial markets on Monday. The lira will inevitably come under extreme selling pressure," said veteran emerging market watcher Tim Ash at BlueBay.

"And we all know that (Central Bank Governor Sahap) Kavcioglu has no mandate to hike rates, so the only defence will be spending foreign exchange reserves the CBRT does not have."

Erdogan's political opponents said his call to expel the ambassadors was an attempt to distract attention from Turkey's economic difficulties, while diplomats hoped the expulsions might yet be averted.

The expected rate cuts by the big three state banks were to cover corporate, individual and mortgage loans, Reuters reported on Sunday, citing sources familiar with the plan.

Cemil Ertem, a chief adviser to the Turkish presidency and a Vakif Bank board member, said on Twitter (NYSE:TWTR) that state banks had cut loan rates down to the central bank's policy rate.

Analysts said such a move could support some borrowers but also exacerbate pressure on the lira and the economy, given that Turkey's benchmark bond yields shot up after last week's central bank rate cut.