Turkish lira withering under pressure from Washington

The souring of Turkish and US relations on Thursday sent the Turkish lira to a record low in London trading, with the currency plunging over 3% to 5.4385 per US dollar, after an unnamed US official said that a Turkish delegation had on Wednesday refused to commit to the release of American pastor Andrew Brunson, who is being held on charges of espionage.

The drop takes this year’s loss in the currency to almost 30% and to over 280% over the past five years.

In an attempt to stem the ongoing crisis in currency markets, Ankara said Berat Albayrak, finance minister, would announce a "new economic model" on Friday.

In a statement, the Turkish finance ministry said it planned to hold the budget deficit to less than 2% of gross domestic product this year and that GDP growth next year is expected to fall to between 3 and 4%, a drop from a previous forecast for growth of 5.5% for both this year and the next.

Michael Every, analyst at Rabobank, said: "The diplomatic spat with the US adds to the domestic challenges that plague lira-denominated assets, as the currency continues to depreciate."

In a note to investors, Every added that the ongoing decline in the lira's value was "only adding fuel" to the high inflation rate of nearly 15% "raging through the Turkish economy".

Turkish President Recep Tayyip Erdogan has repeatedly criticised high interest rates, blaming the currency’s weakness on foreign influences.

The currency has weakened by 8% since the US began adopting its latest measures, including financial sanctions against two Turkish government ministers, piling pressure on the country’s central bank to raise rates in order to prevent a further acceleration in runaway prices.

Investors are understood to be increasingly worried about the central bank’s independence after it opted not to raise interest rates in July despite rapid price growth and market expectations for a move.

Turkish rate-setters are next scheduled to convene on 13 September, but may call an unscheduled meeting sooner.