Investors Doubting Turkish Central Bank Action Worsen Lira Slide

  • Currency has slumped to record lows four times this week
  • Ministers, Erdogan advisers say central bank won’t intervene

The widespread assumption that Turkey’s central bank won’t raise interest rates is piling pressure on the currency, exposing the lira to a speculative attack as a global rout across emerging markets deepens.

The currency fell to an intraday record four times this week, including on Friday when it reached 3.4084 per dollar, after government officials including advisers to President Recep Tayyip Erdogan said the central bank wouldn’t step in to stem the depreciation. The exchange rate has suffered the worst losses in emerging markets this month, surpassing even Mexico’s peso.

Beyond getting caught in the exodus from riskier assets in the wake of Donald Trump’s election win, Turkey’s lira is suffering as investors doubt central bankers will be able to act independently in the face of pressure from politicians to keep borrowing costs low. Prime Minister Binali Yildirim said the government would discuss the currency at a meeting set to include the central bank governor, helping trim the day’s losses.

"The market is betting on the central bank’s inaction," Haluk Burumcekci, an economist at Burumcekci Consultancy in Istanbul, said by phone on Friday. "Markets think that the central bank will not be able to raise rates."

Political pressure on monetary policy in Turkey isn’t new. For years, Erdogan has argued that interest rates should be cut to stimulate the economy even at the risk of stoking inflation. While the rate fell to a 14-month low of 7.2 percent it October, it remains more than two percentage points above central-bank targets.

No Demand

Policy makers shaved 250 basis points off the key overnight lending rate since March to 8.25 percent. While they kept it unchanged in October, losses in the lira started to accelerate as the global rout in emerging markets worsened and speculation grows that companies will eventually need to boost foreign-currency assets to fix a mismatch with debt.

The currency traded 0.1 percent weaker at 3.3731 per dollar by 6:24 p.m. in Istanbul, extending its weekly depreciation to 3.6 percent, the most since a failed attempt to overthrow Erdogan in July. Local government bonds slumped for sixth week, with 10-year yields climbing 26 basis points to 11.11 percent.

The central bank won’t intervene in the exchange rate, Cemil Ertem, an adviser to Erdogan, said in a television interview yesterday, echoing remarks by officials including Economy Minister Nihat Zeybekci and Deputy Prime Minister Nurettin Canikli. Another Erdogan adviser, Bulent Gedikli, went further, saying on Wednesday that exchange-rate forecasts should be ignored and the central bank still had room to cut rates.

Keep Selling

“There’s not a lot they can do," Win Thin, the head of emerging markets at Brown Brothers Harriman & Co, said by e-mail. "Foreign reserves are way too low to contemplate foreign-exchange intervention, while we all know that the government has little appetite for rate hikes."

Gross foreign-exchange reserves dropped to $106 billion as of Nov. 11, from a high of $115 billion in 2013, according to central bank data. The net figure stripping out commercial lenders’ required reserves held with the central bank stands at $35.6 billion, according to Turk Ekonomi Bankasi AS estimates.

Turkey is one of the most vulnerable countries in the emerging world to higher Federal Reserve interest rates because it relies on capital inflows to finance its current-account deficit. As U.S. borrowing costs climb, the benefit of holding higher-yielding assets in emerging markets diminishes.

The country’s economic coordination board will convene at 4 p.m. in Ankara Friday, the prime minister’s office said by e-mail. While the lira looks oversold by technical indicators such as the 14-day relative strength index, the pain may continue without central bank action, according to Henrik Gullberg, a strategist at Nomura International Plc.

“Fundamentally it is hard to find any positives," Gullberg said in an e-mailed note. Unless the central bank raises interest rates at next week’s meeting and signals more tightening is in store to tame inflation, investors should sell the lira, he said.

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