By Daren Butler

ISTANBUL, Reuters – The Turkish lira fell to a new record low of 9.85 against a dollar Monday morning after President Tayyip Turkey said that he had expelled the Ambassadors from the United States of America and nine other Western Countries.

Erdogan will preside at a cabinet meeting at three o’clock in the afternoon (1200 GMT). Market attention was on any development on the issue of the Envoy. Around 1600 GMT, the president usually issues a statement after the meeting.

Three people familiar with the plans said that Turkey’s State Banks were likely to lower borrowing costs by about 200 basis points on Monday.

At 0651 GMT, the lira traded at 9.8 against the U.S. dollar. Bankers blamed Erdogan’s remarks on Saturday for the early weakness. The lira fell 24% this year to close at 9.95950 on Friday.

Last week, the currency hit new lows after the Turkish central banking (CBRT), despite increasing inflation, cut its policy rate 200 basis points. This shock decision was criticized by economists as well as opposition legislators.

Win Thin from Brown Brothers Harriman stated that the central bank was clearly signaling to growth that inflation is not a priority.

He indicated that a rate-cut was likely for the next meeting of policy on Nov. 18. However, inflation is expected to increase due to falling liras and higher energy prices.

Thin stated, “Besides deteriorating foundations, tensions between the West and Turkey are likely to rise after President Erdogan announced that ambassadors of ten countries would not be welcome in Turkey”.

The selloff continued, and Turkish Lira’s implied volatility gauges rose. They reached their highest levels in six months, reaching the three-month, one-month, and one-week measures.

DIPLOMATIC EXPRESSIONS

Erdogan stated that on Saturday, he had instructed his foreign ministry not to send envoys asking for the release Osman Kala, a businessman and philanthropist who was in prison for over four years but has never been convicted.

On Monday morning there were no signs that the foreign minister had followed the President’s instructions. This would have been the most severe rift between Turkey and the West during Erdogan’s 19-year tenure.

“I’m worried about Turkish financial markets tomorrow. BlueBay veteran market observer Tim Ash said that the lira would inevitably be under severe selling pressure.

“And, we know (Central Bank Governor Sahap), Kavcioglu does not have the authority to increase rates. So the CBRT cannot spend foreign exchange reserves that they do not possess.”

Erdogan’s political enemies claimed that Erdogan’s call for the expulsion of the ambassadors was an attempt at distracting attention from Turkey’s economic problems. Diplomats however hoped that the expulsions could still be avoided.

According to Reuters on Sunday, rate cuts expected by the three big state banks will be made for individual, corporate, and mortgage loan loans.

Cemil Ertem is a key adviser to Turkey’s presidency and Vakif Bank Board member. He stated on Twitter (NYSE 🙂 that the state banks have reduced loan rates to match the policy rate of the central bank.

Analysts believe such a move would support some borrowers but increase economic pressure due to Turkey’s high benchmark bond yields.