Turkish lira hits new record low on rate freeze, uncertainty

The bank decided to implement a tighter liquidity policy “as long as deemed necessary”, it said in a statement accompanying its rates decision.

The embattled Turkish lira on Tuesday tumbled to a new record low against the dollar as investors reacted to ongoing political uncertainty and a freeze in interest rates by the central bank.

“True to form, Turkey’s steadfastly dovish central bank left its main interest unchanged in the face of a dramatic deterioration in sentiment towards Turkish assets”, said Nicholas Spiro, of Spiro Sovereign Strategy.

The lira lost 1.31 percent in value to trade at 2.906 to the dollar, the first time it has broken through the psychologically important 2.9 barrier.

“Generally speaking, the hikes in the policy rate in the coming months will be tied to Fed rate hikes”, Muammer Komurcuoglu, an economist at Is Invest who attended the meeting, told Reuters. It stood at 2.8820 at 1113 GMT.

The central bank will put in place a series of measures that will increase the size and flexibility of banks’ holdings in foreign currencies.

In a statement, the central bank said a backdrop of falling food and energy prices, plus domestic and global market uncertainty were factored in its decision.

He also said there had been an 8 percent drop in Russian gas sales to Turkey in the last 5-6 months, without giving further details.

Turkish Prime Minister Ahmet Davutoglu formally ended attempts to form the next government on Tuesday after weeks of coalition talks failed, raising the prospect of a fractious interim administration leading the country to a new election.

A day after the policy-setting meeting, the bank further frustrated investors with a presentation that suggested it would take its cue for rate hikes from the U.S. Federal Reserve, according to some economists present.