Lira Extra Tightening Policy Discarded by Market: Turkey Credit

The market is telling Turkey’s central bank that more must be done to shore up the lira, the world’s worst-performing currency in the past five weeks.

The lira fell as much as 1.7 percent today before the central bank unexpectedly intervened in the market. Central bank Governor Erdem Basci kept interest rates unchanged on Jan. 21 in favor of raising funding costs for lenders on “extra tightening days.” While banks will pay 9 percent for liquidity on these occasions, the currency recorded its ninth-straight daily drop and two-year note yields rose to 10.5 percent, the most after Brazil among 19 emerging-bond markets tracked by Bloomberg.

Basci’s decision was in keeping with demands by government officials to hold interest rates to spur the economy even as the plunging currency threatens to spark an acceleration in inflation that’s been higher than the central bank’s target. While the first extra tightening operations will be next week, they won’t prevent the lira from weakening further, according to Bhanu Baweja of UBS AG and Ibrahim Aksoy at Gedik Investment Securities Inc.

“This won’t be enough to stem the slide of the lira,” Aksoy, chief economist at Gedik in Istanbul, said by phone yesterday. “It will again be among the hardest hit currencies when another selling wave across emerging markets begins. This is a total disappointment.”

Record Low

The lira slid to an all-time low of 2.2977 per dollar before trading 0.7 percent weaker at 2.2732 as of 3:51 p.m. in Istanbul in the longest run of declines since 2001.

The central bank sold foreign currency because of “unhealthy price formations seen in exchange rates,” according to a statement on its website. The lira has tumbled more than 10 percent since a probe into government graft erupted on Dec. 17. The Federal Reserve said the next day it would start paring stimulus measures that helped spur demand for higher-yielding assets.

Turkey’s currency is “reflecting domestic political uncertainty,” Gulay Elif Girgin, chief economist at Seker Invest in Istanbul, said by phone yesterday. The bank’s decision amounts to a “stealth rate increase,” she said.

The central bank said yesterday it will hold the first tightening days on Jan. 27. A second operation will be Jan. 30. The Fed starts a two-day meeting on Jan. 28.

We were negative on the lira for most of 2013, Baweja, who heads emerging-market cross-asset strategy at UBS in London, said by phone yesterday. “We were thinking whether Jan. 21 will be the day that we’ll turn neutral on the lira. But given what the central bank has done, we see absolutely no reason to do that.”

Lira Outlook

The lira may depreciate to 2.40 per dollar over the next three-to-six months as demand for foreign currency increases from locals, according to Baweja.

Basci vowed in August to keep rates on hold last year as the economy recovered from its worst growth since a recession in 2009. The expansion will probably slow to 3.5 percent this year, from 3.85 percent in 2013, according to Bloomberg surveys of economists.

“We don’t have to implement orthodox approaches in monetary policy just because others want it,” Finance Minister Mehmet Simsek was cited as saying by state-run Anatolia news agency in Ankara on Jan. 15.

The yield on Turkey’s two-year lira notes rose 28 basis points to the highest in two years. The yield has increased 546 basis points, or 5.46 percentage points, since the Fed signaled May 22 that it could start tapering its bond-buying program. The yield on similar-maturity Brazilian securities is 11.93 percent.

Inflation expectations for the next 24 months climbed to 6.5 percent, the highest level since December 2011, according to a central bank survey of economists released Jan. 17. That’s up from 5.8 percent in May, the data show. Price growth quickened to 7.4 percent in December from 7.32 percent a month earlier, the state statistics office said on Jan. 3. The central bank’s target is 5 percent.

“We haven’t got a credible monetary policy to protect the currency,” said Gedik’s Aksoy.

Before it's here, it's on the Bloomberg Terminal.