Erdogan Plan Spooks Investors, Market Punishing Currency

The Turkish lira and bonds declined to a new record after President Recep Tayyip Erdogan said he plans to take more responsibility for monetary policy if he wins an election next month, spooking investors who worry about his distaste of high interest rates.

Erdogan’s comments are spoiling bets that a meeting at his palace last week with economic policy makers—including central bank governor Murat Cetinkaya—would open the way for rate increases. Some traders had been positioning for a hike at an unscheduled monetary policy meeting, Bloomberg reported.

The lira has weakened 13% against the dollar this year, extending the biggest depreciation among emerging-market currencies after the Argentine peso, and the yield on 10-year notes has surged to an all-time high. Investors say double-digit inflation and the economy’s growing twin deficits require rates to move higher in order to stabilize the nation’s assets against the prospect of higher US borrowing costs.

“Investors have been seeking a 100 basis point—150 basis point emergency central bank hike to stabilize the lira, which may now be in doubt,” Chris Turner, the head of foreign exchange strategy at ING Groep NV in London, wrote in a note to clients.

The lira fell as much as 0.7% to an all time low of 4.398 per dollar, before paring its decline to 0.5% as of 12:00 pm in Istanbul.

Erdogan’s comments come days after the lira’s implied-carry appeal versus the rand declined to the lowest in more than a year. The spread between their potential one-month carry trades fell to 0.27% per unit of volatility on Friday, and has been little changed since. The currency weakened as much as 0.7% before trimming its loss to 0.1% in London. The nation’s bonds also slumped to a new record low.

The rout comes ahead of an auction of two- and five-year government bonds by Turkey’s Treasury, a key test of investor appetite for one of the highest-yielding local currency notes in emerging markets.

Government bond yields surged across the curve, compounded by a lack of liquidity in the market. The yield on two-year notes jumped 44 basis points, while five- and 10-year yields surged 50 basis points to push the latter to 14.40%.

Citigroup Inc. on Monday said it closed out a long dollar-lira recommendation, and moved to a neutral stance on Turkish government notes from underweight.

“The problem is Erdogan’s interference and lack of confidence that the central bank has any independence to pursue policies of its own accord,” said John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S. “The market will punish the lira.”

  Promising More Efficiency

Erdogan has said he will be more effective in Turkey’s economy and monetary policy if he wins the June 24 elections.

In an interview with Bloomberg TV in London on Monday, Erdogan said: “When the people fall into difficulties because of monetary policies, who are they going to hold accountable? They will hold the president accountable. Since they will ask the president about it, we have to give off the image of a president who is influential on monetary policies.”

He said steps would be taken to protect Turkish interests. “However, we will take these steps to protect Turkey’s interests. We will do whatever it takes for our country’s interests.”

About how ties with the central bank will continue, Erdogan said: “We have a relationship with the central bank now, and it will continue in the same direction. We are not new in country management, we are not just taking over the duty; we have been running the country continuously for 16 years.”

He said monetary policies will be applied in accordance with global principles. “This management approach is what is in America, what it is in Europe, it will be the same in Turkey. Something that is legitimate for them cannot be illegitimate for us. Everyone knows that. We will take our steps accordingly. We will never have our country lose.”

Erdogan also said Turkey’s central bank is independent, but it will make evaluations according to the president’s signals. He said cutting interests will bring lower inflation.

  S-400 Missiles

Asked if Turkey was prepared in case the US imposes sanctions after purchasing S-400 missiles from Russia with NATO systems, Erdogan said Turkey is a member of NATO and it cannot cut ties with Russia.

Erdogan recalled NATO Secretary General Jens Stoltenberg’s words that the Turkish plan to buy Russia’s S-400 air defense missile system reflects the country’s “national decision”.

“At this moment, we have liberty and independence—in terms of protectionism and measures that we need—the ability to receive such needs from any of our allies,” he said.

“If we cannot get these [needs met] from the US, if the senate does not allow it, if Congress does not allow it, are we not going to look after ourselves? Of course, we will look after ourselves.”