Turkish Lira Recovers on Bets Erdogan to Support Basci Autonomy

The lira climbed from the lowest close on record on speculation that Turkish President Recep Tayyip Erdogan will signal he supports the central bank’s autonomy, allowing investors to focus on improving economic data.

The currency rose 1 percent to 2.6121 per dollar at 10 p.m. in Istanbul, the most in a month.

Erdogan held talks on Wednesday with central bank Governor Erdem Basci, who’s been the target of criticism by the president and his government allies for keeping interest rates too high. The tensions between policymakers have helped drive the lira to a record low.

Participants at the meeting in Ankara agreed on the need to preserve “the current environment of stability and confidence,” Erdogan’s office said on its website. The president’s “sensitivity” on the subject of interest rates was also addressed, it said.

The central bank published the presentation given by Basci to Erdogan, which focused on the need for stability and an improvement in inflation expectations for rates to come down.

Turkish politicians are toning down their rhetoric on the central bank after their calls for deeper interest-rate cuts stoked concern among investors that the government was trying to undermine Basci’s authority. The prime minister’s office said on Tuesday that the central bank is independent in the tools it uses to carry out monetary policy and has had a good track record since 2002.

Underlying Story

A smaller than expected current-account deficit reported on Wednesday also helped trim the lira’s 11 percent depreciation this year.

The trade data show lira weakness “runs against the underlying fundamental story,” Timothy Ash, chief emerging-market economist at Standard Bank Plc in London, said by e-mail. “If politicians had kept their thoughts on monetary policy to themselves, the lira would have been strong/stable, inflation and the current-account deficits would be moderating, leaving significant scope for further rate cuts.”

Yields on two-year notes rose one basis point to 8.86 percent. The Borsa Istanbul 100 Index rallied from a four-month low, adding 0.4 percent.

Basci has cut Turkey’s benchmark rate by 250 basis points, to 7.5 percent, since more than doubling it in January 2014 to halt a run on the lira. Erdogan has led calls by politicians for faster reductions to support the economy. Turkey holds parliamentary elections in June. The central bank’s next rates meeting is March 17.

Market Doubts

Even if there’s a “relief rally” after the Erdogan-Basci meeting, it may not last long, said Bernd Berg, a strategist at Societe Generale in London.

The argument among Turkey’s policy makers is only part of the reason the lira has been sliding. Other emerging markets have been hit too, as expectations of higher interest rates in the U.S. reduces demand for riskier assets.

Conditions for such currencies will “remain challenging,” while in Turkey “the market will doubt that the cease-fire between the government and the central bank will last long,” Berg said by e-mail late Wednesday.

He predicted the lira will weaken past 2.70 per dollar “very soon.”

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