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By Bloomberg

The Turkish central bank is becoming a spectator to the lira’s retreat, as reserves dwindle and political pressure neutralizes its most effective tools for intervention.

The currency plunged to its fourth record-low this month on Friday, capping the longest run of declines since January last year. That’s when Governor Erdem Basci was forced to more than double interest rates to halt a lira rout after $18 billion of interventions failed to stem the slide. The central bank’s options are now limited by its lowest net reserves in more than six months and political clamoring for lower borrowing costs, according to Ozgur Altug at BGC Partners Inc.

Even Basci’s ability to support the lira by utilizing his three-tier rates corridor for bank funding has been curtailed as the cost of overnight interbank lending is already at the highest since the central bank last cut rates Feb. 24. Credit Agricole SA cut its lira forecast last week along with Societe Generale SA whose strategist Bernd Berg said Turkey faces “a home-made currency crisis.”

“The lira seems to be caught in a trap,” Altug, head economist at BGC, said by e-mail on Monday. “Market players are acknowledging that the bank’s hands are almost tied because of the political friction, so the trend for depreciation looks like it will continue.”

The lira has weakened 11.5 percent in this year’s biggest emerging-market currency slump after Brazil’s real.

No Worry

Economy Minister Nihat Zeybekci said March 7 that the exchange rate is “nothing to worry about” and the central bank should have cut rates two more times. Customs and Trade Minister Nurettin Canikli said last weekend that the central bank should end its “cowardice” and lower interest rates to spur investments. Industrial output data released Monday showed the biggest slump since 2009.

The lira’s weakness has a cost. Banks’ foreign-currency liabilities have increased more than fourfold since 2010 to a record in December.

A spokesman for the central bank didn’t immediately respond to calls seeking comment.

Renaissance Capital analysts including Michael Harris say the lira looks oversold compared to other emerging-market currencies, and strong fundamentals will win investors back provided politicians including President Recep Tayyip Erdogan tone down their calls for lower rates. Prime Minister Ahmet Davutoglu went to New York with Finance Minister Mehmet Simsek to meet with investors and calm nerves about the rout in Turkish markets last week.

‘On Fire’

“If we thought Erdogan was happy to see the lira slide, we would concede defeat and move on – but we are convinced a weak lira carries enough political pain to temper the government’s harsh rhetoric,” the Renaissance analysts wrote Monday.

Turkey has been a beneficiary of the falling price of oil, narrowing the current-account deficit to $46 billion last year from $65 billion in 2013. Core inflation, which excludes food and fuel, dropped for a seven straight month in February.

Such indicators are a poor guide to the lira when political tensions run high, said Altug at BGC.

“There’s no doubt the lira is on fire” and will continue to weaken, Cristian Maggio, the head of emerging-market research at Toronto-Dominion Bank in London, said in e-mailed comments on Friday. “Rates aren’t tight enough in the face of the local campaign” from politicians, he said.