The Turkish Lira declined to new record lows against the Pound Sterling and US Dollar on Tuesday as accelerating inflation increased concerns over the strength of the emerging market economy. The TRY/GBP exchange rate tumbled to 0.2567 and the TRY/USD exchange rate slid to 0.3947
The Turkish currency resumed its downward slide as data showed that inflation remains well above the Turkish Central Bank’s target. The rise in consumer prices limits the bank’s ability to take action to make the deep interest rate cuts being demanded by President Tayyip Erdogan.
According to the data released by the Turkish Statistics Offices, Consumer Prices increased by 0.71% in February and rose by 7.55% on an annual basis. The rate of inflation is significantly higher than the central bank’s target of 5%.
The cause of the Lira’s sharp declines is a result of investors becoming increasingly concerned by government interference in how the central bank operates.
President Erdogan has pressured the central bank to ease its monetary policy and slash interest rates ahead of June’s general election. Erdogan ranted that defending high interest rates is ‘equal to treason against the nation’. He also demanded that the bank’s governor Erdem Basci ‘shape up’.
Erdogan’s comments over the past few months have raised concerns that the Turkish Central Bank could be losing its independence, as criticism of it becomes hostile pressure. The Lira also came under pressure from the strength of the US Dollar and concerns over the escalation in the fighting taking place in Iraq and Syria.
With Islamic State operating close to Turkey’s border investors are nervous that a broadening of the conflict could inadvertently drag the Turkish military into the fighting. Last week a contingent of Turkish tanks and troops crossed into Syria to repatriate a number of Turkish soldiers who had been guarding the tomb of the grandfather of the founder of the Ottoman Empire.
The Pound Sterling advanced after it received support from a better than forecast Construction PMI report. The data compiled by Markit/CIPS showed that activity in the UK’s construction sector increased to a four-month high last month. The PMI rose to 60.1, a figure that beat forecasts for a fall to 59.0. Any figure above 50 in a PMI indicates expansion whilst a number below indicates contraction.
The US Dollar, meanwhile, received support from the latest ISM New York Index which increased to 63.0 in February from 44.5 in January.