Turkey's currency crisis accelerated on Friday as it plunged 8% to a new record low, gripped by concerns over an inflationary spiral brought on by President Tayyip Erdogan's unorthodox plan to slash interest rates in the face of soaring prices.
The lira hit 17.0705 to the dollar, triggering direct central bank intervention in the market to prop up Turkey's battered currency - its fifth effort this month to address what it called "unhealthy" prices.
"We are still not ready to catch the falling knife," he said of the possibility of re-investing in Turkish assets. "As long as Erdogan is at the helm there is nothing to prevent the lira from continuing to depreciate."Erdogan announced a 50% hike in the minimum wage, to 4,250 lira per month next year. But that is expected to boost overall consumer price inflation by 3.5 to 10 percentage points.
Turkey's dollar-denominated sovereign bonds faced pressure, with some longer-dated issues down as much as 1.3 cents, according to Tradeweb. Spreads over U.S. Treasuries widened to 579 basis points on the JPMorgan EMBI indexFive-year credit default swaps rose 3 bps from Thursday close to 529 bps, their highest since Dec. 6, data from IHS Markit showed.
If the rate-cutting cycle were to continue the possibility of capital controls could be on the rise, Rybnikov added. "This is not our base line...we believe that as a policy measure, they would be used as a measure of last resort."
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