3 Min Read
* Lira has slumped 24 percent since failed July coup
* Central bank lowers forex required reserves
* Deputy PM says economy under attack (Adds central bank statement, lira losses stemmed)
By Daren Butler
ISTANBUL, Jan 10 (Reuters) - The Turkish lira slumped to new lows on Tuesday, passing 4.0 to the euro for the first time and extending a slide since the start of the year, as a deputy prime minister repeated a warning that the economy was under attack.
Islamic State and Kurdish militant bombings, an economic slowdown and political uncertainty over plans to bolster President Tayyip Erdogan's powers have all unsettled investors. The central bank's reluctance to hike interest rates to stem the lira's falls has only compounded the concerns.
The bank responded to the lira slide by cutting forex required reserves, in a move adding $1.5 billion liquidity to the financial system, and vowed additional steps if necessary. The statement helped stem the lira losses.
The lira hit a low of 3.7870 against the dollar, from a close of 3.7130 on Monday, bringing losses since a failed coup in July to 24 percent. It stood at 3.7575 at 1137 GMT after the central bank comments, still a daily loss of 1.2 percent.
"Instead of tightening monetary policy directly, the Bank prefers to tighten TL liquidity conditions and ease FX liquidity conditions, which might be perceived as a smoothening step, but might not reverse the actual course," said BGC Partners chief economist Ozgur Altug.
The lira also hit a low of 4.0054 against the euro , from a close of 3.9231 on Monday. It stood at 3.9740 after the central bank statement.
Deputy Prime Minister Nurettin Canikli, who has said the economy was being targeted by "sabotage and attacks", singled out a report from ratings agency Moody's saying banking profits would be hit by increased non-performing loans.
"This is actually an attack. They will not be able to succeed in any way," he said in a speech in Ankara. The Moody's report had no validity and there was zero risk of the banking sector's asset quality worsening, he added.
Erdogan's demands for lower borrowing costs to boost growth are seen as constraining the central bank's ability to raise rates. Those demands are unlikely to abate after the economy shrank 1.8 percent in the third quarter.
The central bank (CBRT), which left rates on hold last month, is expected to come under fresh pressure from financial markets to raise them when it meets on Jan. 24.
"(The) lack of policy reaction keeps the depreciation pressure alive, as CBRT remains put and does not react either through lira or FX liquidity policy tools," said Turk Ekonomi Bank strategist Erkin Isik.
Plans for constitutional reform that would create an executive presidential system, handing Erdogan more powers, meanwhile passed another hurdle on Tuesday when parliament voted to debate details of the proposal. (Reporting by Nick Tattersall, Tulay Karadeniz and Nevzat Devranoglu; Writing by Daren Butler; Editing by Ece Toksabay and Mark Trevelyan)