Turkish central bank to take action as lira tumbles

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Turkey’s central bank said on Wednesday it would take action against the tumbling of the lira, after it weakened beyond 4.5 against the dollar for the first time, hit by concern about President Tayyip Erdogan’s influence over monetary policy.

The statement from the bank came after investors lashed the lira for two days running following comments from Erdogan, who said he planned to take greater control of the economy after a national election next month.

That has exacerbated fears about central bank independence. Erdogan, a self-described “enemy of interest rates”, wants borrowing costs lowered to fuel credit growth and new construction. Financial markets want to see decisive interest rate increases to rein in double-digit inflation.

“The (central bank) is closely monitoring the unhealthy price formations in the markets,” the bank said in a statement. “Necessary steps will be taken, also considering the impact of these developments on the inflation outlook.”

Turkish media reported that Erdogan would meet with the central bank governor, Murat Cetinkaya, and other economic officials to discuss market developments. The lira clawed back some of its losses as expectations of emergency action strengthened.

“Market sentiment towards Turkey is quickly evaporating,” said Jason Tuvey, an emerging markets economist at Capital Economics, in a note. “We now think that an emergency rate hike, in the order of 200 bps will happen in the next week or so.”

However an official told Reuters that Erdogan and Cetinkaya were due to discuss local-currency trade with Iranian officials, and no other economy-focused meeting was on their agenda.

The lira, one of the worst-performing emerging market currencies this year, weakened as far as 4.5010 to the dollar, breaching the psychologically important level of 4.5.

It was at 4.4150 at 1044 GMT, reflecting investor hopes for action from the central bank.

It hit record lows against the euro and the yen . It was also squeezed by a surging dollar, which hit its highest against a basket of currencies since late December.

Erdogan told Bloomberg Television in London on Tuesday the central bank, while independent, would not be able to ignore signals from the new executive presidency that comes into effect after the June 24 vote.

“I still hope and believe that political pragmatism will ultimately prevail,” Deputy Prime Minister Mehmet Simsek said on Twitter. “We remain committed to a sound and prudent policy framework.”

Fund managers who met Erdogan and his delegation during a visit to London this week said they were baffled about how he plans to rein in rising prices while simultaneously seeking lower rates.

“He picks battles with everybody ... now he is fighting the markets, and that is dangerous,” said one fund manager at a major asset management firm, who spoke on the condition of anonymity and whose firm attended a closed-door investor meeting with Simsek.

“You can find your domestic foes all you want, but when you are trying to take on a financial market, that is a battle you can’t really win.”

The yield on the benchmark 10-year bond rose to 14.94 percent while the main BIST 100 share index dipped 0.63 percent.

The sell-off in the lira has weighed on Turkish equities. Turkish blue chip stocks are down more than 25 percent in dollar terms this year, making them the second-worst performer among 30 emerging market stock indices.

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