Lira Slides as Tensions With Russia Push Turkish Assets Lower

  • Russia starts trade retaliation for Turkey downing warplane
  • Turkey drops word “independent" in reference to central bank

The lira weakened for a fourth day and stocks fell the most worldwide as Russia ratcheted up pressure on Turkey for shooting down its warplane and traders weighed a change of wording in the government’s policy program regarding central bank independence.

The currency fell in its longest losing streak in two months and bond yields climbed to a six-week high as Russia started trade retaliation after Tuesday’s incident. Turkey’s new government dropped the word “independent" from a reference to the central bank’s choice of monetary policy and tools in its program announced on Wednesday. Deputy Prime Minister Mehmet Simsek said the change doesn’t reflect a curtailment of policy makers’ autonomy.

“The lira has been on the back foot since the Russian plane incident,” sau Emir Baruh, a trader at Akbank TAS in Istanbul, said by e-mail. “Today there were also headlines about what the central bank’s role will be. Although these claims were dismissed by Mr. Simsek, the market is still not feeling the confidence.”

For investors who were already concerned about the effects an escalation of tension with Russia will have on Turkey, the change in language in the government’s plan is yet another potential risk to consider after the AK Party’s decisive victory in this month’s election. President Recep Tayyip Erdogan as recently as Nov. 18 said Turkey’s “market rates of interest” should be reduced.

New Program

Turkey’s currency weakened 0.9 percent to a two-week low of 2.9159 per dollar at 6:06 p.m. in Istanbul. The yield on 10-year government bonds jumped 16 basis points to 10.21 percent, the highest since Oct. 14 on a closing basis. The Borsa Istanbul 100 Index slid 2.4 percent to a seven-week low.

The government’s new program says “it will continue to be fundamental that the central bank directly determine by itself the monetary policy tools it will utilize to attain price stability.” The last program, from September 2014, said the central bank “will continue to determine monetary policy and the monetary policy tools it will use to attain price stability in an independent fashion.”

That change is minor and investors shouldn’t read too much into it, according to Ozgur Altug, the chief economist at BGC Partners in Istanbul.

“In previous AKP government programs, the central bank’s monetary policy actions were defined with similar but different phrases," he said. "The essence remains the same.”

Russia said it will subject agricultural products from Turkey to additional border checks and laboratory controls after 15 percent of goods were found to breach Russian requirements. The move comes after President Vladimir Putin said the downing of the jet was “a stab in the back.” The incident is the first direct clash between foreign powers embroiled in the Syrian civil war.

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