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May 25, 2018 www.intellinews.com I Page 2
Turkish lira turbulence returns despite emergency hike
Investors are clearly not convinced that Turkish President Recep Tayyip Erdogan — an economic populist who is an advocate of securing even cheaper money to drive growth despite Turkey’s overheating economy, surging current account deficit and double-digit inflation — will preserve the independence of the central bank’s monetary policy committee should he be returned to power as the country’s first ever executive president in the June 24 snap elections. He may have been conciliatory on this point after Turkey bowed to the markets with its interim rate increase, but the ‘unchained’ interview he gave to Bloomberg TV in London at the start of last week will linger long in the minds of those who’d rather stick to classic monetary theory.
“[The emergency interest rate hike of 300bp to 16.5%] might prove insufficient to stabilise the currency, as concerns about monetary policy- making in the post-election period will remain... given the president’s vow to tighten his grip on economy policy,” Gokce Celik, chief economist at QNB Finansbank, wrote in a note to clients.
The fate of the lira, down around 20% against
the dollar in the year to date, and 30% since last September, is increasingly being seen as a danger to Erdogan’s re-election chances. His rivals
for the throne—which will come with sweeping powers, the scrapping of the post of prime minister and the diminishing of parliament’s powers—are increasingly pointing the finger at him for economic mismanagement.
“Confidence shattered”
The rate increase “won’t trigger a sustainable reversal in USD/TRY after confidence has been shattered over the past few weeks,” Piotr Matys, an emerging-market currency strategist at Rabobank in London, told Bloomberg. “More is required to restore confidence among investors and the central bank may have to tighten monetary policy further perhaps as soon as on June 7 [at its scheduled policy meeting].”
The direction the TRY will take in the days ahead is also very much dependent on the external environment. If the dollar stutters, emerging- market currencies may rebound, but if it does
not — note the dollar was buoyed as the US Fed on May 24 indicated a rate hike is likely at its June policy meeting — then the lira may well remain among the weakest currencies of the developing nations.
Foreigners were net sellers of $638mn of Turkish bonds last week, the highest figure recorded since 2016.
On May 24, the yield on Turkey’s 10-year domestic bonds fell to 14.28% from 14.69% on the previous day while 2-year domestic bonds stood at
16.63% falling from 16.71%. The Istanbul stock exchange’s benchmark index, the BIST-100 closed down 0.74% at 101,138.08.
In another move to assist the ailing lira, the central bank on May 23 raised the maximum total amount of forward foreign exchange sale positions to $8bn from $6.15bn for the second quarter of this year.
Less than clear
Following the emergency hike, investors were concerned that both Erdogan and the central