Ankara seeks to defend lira amid concerns, dollar rally

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Turkey has sought to prop up its embattled currency, which has been under pressure amid various economic concerns and an ongoing dollar rally.

In a bid to give a relief to the currency, which hit a new historic low at 4.5 against the U.S. dollar on May 16, the Central Bank announced it was monitoring markets and would take necessary steps.

“The CBRT [Central Bank of the Republic of Turkey] is closely monitoring the unhealthy price formations in the markets,” the bank said in a statement.

“Necessary steps will be taken, also considering the impact of these developments on the inflation outlook,” the bank added.

Following the statement, the lira rebounded to 4.41 against the greenback from its historic low, while the dollar held firm near a five-month high helped by gains in long-term U.S. Treasury yields.

On May 16, Deputy Prime Minister Mehmet Şimşek, a former Merill Lynch banker trusted by the financial markets, vowed on Twitter that the government remains “committed to a sound and prudent policy framework.”

“The policy mix is much more likely to improve post elections,” he wrote in English, saying he hoped “political pragmatism” would prevail and emphasizing a “rule-based market economy is the only viable option going forward.”

The fall in the lira speeded up on May 15 as investors took fright at comments by President Recep Tayyip Erdoğan that he wanted a bigger say in monetary policy.

In an interview with Bloomberg TV on May 15 while on a visit to London, Erdoğan signaled he wanted to take greater control over monetary and economic policy if he wins the elections.

Erdoğan, in an interview with Bloomberg Television on May 15, said the Central Bank, while independent, would not be able to ignore signals from the new executive presidency that comes into effect after the June polls.

A self-described “enemy of interest rates,” Erdoğan wants borrowing costs lowered to fuel credit. “I will take the responsibility as the indisputable head of the executive in respect of the steps to be taken and decisions on these issues,” he said in the interview.

Erdoğan’s investor meeting 

Meanwhile, fund managers who met Erdoğan and his delegation in London on May 15, part of a three-day visit to Britain, were baffled about how he plans to tame rising inflation and a currency in freefall – while simultaneously seeking lower interest rates, according to a follow-up Reuters release.

Speaking on condition of anonymity due to the political sensitivity of the meetings, investors told Reuters they were flabbergasted by his stance and willingness to go into battle with world markets at such a fragile time.

A portfolio manager, who attended a meeting with Erdoğan, said the president had been “very honest” and clear about where he expected interest rates to go if he should win the elections on June 24.

“Erdoğan … said when he [is re-elected] president, he will ensure rates will be low, not high,” the portfolio manager said. “His view is that high rates lead to high inflation, I’m not sure I agree with that view.”

Having weakened five straight years already, the lira is on track for a 15 percent fall since the start of the year against the dollar – making it one of the worst performing emerging market currencies, amid various economic concerns, including a persistently high inflation rate.

“He thinks the market is a bunch of speculators, and that is not his audience, his audience is ordinary people in Turkey and they need lower rates,” said another asset manager, whose firm also attended the Erdoğan’s meeting.

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