Turkey’s central bank on Wednesday vowed to take “necessary steps” to stabilise the embattled lira after it hit historic lows as investors took fright at comments by President Recep Tayyip Erdogan that he wanted a bigger say in monetary policy.
The lira has lost eight percent in value over the last month alone as Turkey heads to snap presidential and parliamentary elections on June 24 amid growing concerns over the health of the economy.
In an interview with Bloomberg TV on Monday while on a visit to London, Erdogan signalled he wanted to take greater control over monetary and economic policy if he wins the elections.
“This may make some uncomfortable. But we have to do it,” he said.
Investors have long been rattled by Erdogan’s sustained pressure on the central bank — which is nominally independent — to hike rates to boost growth.
– ‘Not what investors wanted’ –
“The comments from Erdogan were clearly not what investors wanted to hear,” said Jameel Ahmad, global head of currency strategy and market research at forex broker FXTM, saying they were seen “at the very least as a severe threat to central bank independence.”
The lira earlier in the morning hit 4.5 lira to the dollar for the first time in history, a loss in value of over one percent on the day.
However a statement by the central bank on the “unhealthy” fluctuations helped the lira to pare its losses in the afternoon to trade at 4.42, a gain in value of 0.4 percent on the day.
“The Central Bank of the Republic of Turkey is closely monitoring the unhealthy price formations in the markets,” it said.
“Necessary steps will be taken, also considering the impact of these developments on the inflation outlook,” it added.
It was not immediately clear if the central bank was considering an emergency meeting to raise interest rates help boost the lira. Its next scheduled monetary policy meeting is not until June 7.
Meanwhile, the central bank’s chairman Murat Cetinkaya was at the headquarters of the ruling Justice Party (AKP) and could meet Erdogan, Turkish media said.
– ‘Committed to sound policy’ –
The currency had already been under severe pressure last week after Erdogan declared that interest rates were the “mother and father of all evil”.
Erdogan’s statements fly in the face of economic orthodoxy where interest rates are used by central banks around the world as a tool to keep down inflation.
Economists have cautioned that a tighter monetary policy is needed for an economy where inflation is running at 10.85 percent and the currency has lost 25 percent in value over the last year.
The economy has generally been a trump card for Erdogan in his 15 years in power, with the Turkish strongman crediting himself with ending chaos that brought the country to near financial meltdown in the 2000-2001 crisis.
Turkey recorded stellar growth of 7.4 percent in 2017.
But the elections coincide with growing concerns over Turkey’s economic health, notably due to a wide current account deficit and fears the economy is overheating.
“Investor confidence in Turkey is already at severely low levels,” said FXTM’s Ahmad, adding that if Erdogan managed to achieve a looser monetary policy it would remove one of the few levers Turkey has to combat “dangerously high inflation.”
Deputy Prime Minister Mehmet Simsek, 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 emphasising a “rule-based market economy is the only viable option going forward.”
President Erdogan said he wants to take greater control over monetary and economic policy if he wins the June election