Photographer: Kerem Uzel/Bloomberg

Lira Weakens as Turkish Minister Signals Limits on Central Bank

The lira weakened to a record, extending its third monthly decline, and Turkish bonds fell as a minister’s call to revise central-bank regulations stoked concern the government will restrict its autonomy.

The currency dropped as much as 0.9 percent to 2.5273 per dollar as Economy Minister Nihat Zeybekci said the Central Bank of Turkey’s independence should be conditional on it taking “national interest” into account. Turkish bonds were on course for their worst month in more than six years amid government pressure on Governor Erdem Basci to step up the pace of interest-rate cuts.

“The lira is now poised to tumble much further amid the political turbulences and questions about the independence of the central bank,” Bernd Berg, the director of emerging-markets strategy at Societe Generale SA in London, said in an e-mailed note. “The escalation of political risks is a major concern.”

Basci has been under persistent attack, including from President Recep Tayyip Erdogan, to lower borrowing costs since policy makers more than doubled the main rate in January last year to 10 percent to halt a slide in the lira. Five reductions since then, including a quarter-point drop to 7.5 percent on Feb. 24, failed to appease government officials. Erdogan said the following day that the central bank’s rate policy made him question the body’s loyalties.

Political Pressure

The president told a trade group in Ankara he wouldn’t object to the bank’s independence as long as policy makers “protect the interest of the nation and the country.” Zeybekci said in Ankara on Friday that the bank had behaved “cowardly” and the key rate should be about 6 percent, according to state-run Anadolu Agency.

Finance Minister Mehmet Simsek said on his Twitter page that amendments to the central bank law were “out of question.”

Basci has resisted calls for deeper cuts as the lira tumbles beyond the record lows that prompted last year’s emergency increase, while inflation at 7.2 percent remains more than two percentage points above his target, even after dropping from as high as 9.7 percent last year.

The lira declined 0.3 percent to 2.5113 per dollar by 6:55 p.m. in Istanbul, bringing its depreciation in February to 2.8 percent. It may weaken toward 2.65 over the next four weeks, according to Societe Generale, which also closed all of its bullish trades on Turkey on Friday.

“If politicians have a say in monetary policy they will likely err on the dovish side since they want growth,” Henrik Gullberg, a strategist at Deutsche Bank in London, said by e-mail. “Turkish politicians at present don’t seem to mind a weaker lira. They see that lira is underperforming, but still keep calling for further rate cuts.”

Further Volatility

A more persistent reduction in consumer-price increases “necessitates a cautious approach,” policy makers said in a statement accompanying their Feb. 24 decision. The economy is poised to grow 3.5 percent this year, according to analysts surveyed by Bloomberg. That compares with average expansion of 5 percent in the decade through 2013.

The downward trend in borrowing costs hasn’t supported bonds this month. The yield on two-year notes jumped 33 basis points to 8.81 percent on Friday, bringing the increase in February to 192 basis points.

The selloff Friday came after a central bank spokesman confirmed reports in state-run Anadolu agency on Thursday that Basci had a health check-up. CNN Turk cited Basci as saying Friday that “public duty continues for as long as it’s been assigned, and the duty is performed in the best way possible.”

“Market stress didn’t fully disappear despite the governor’s statements as tension between the president and Basci is still in place and might lead to further volatility over the exchange rate in the period ahead,” Ozlem Derici, an economist at Deniz Invest in Istanbul, said in an e-mailed note.

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