Lira Rally Loses Steam After Turkey Statement Short on Specifics

(Bloomberg) -- A statement following a rushed meeting between Turkish economy officials and President Recep Tayyip Erdogan failed to impress investors, who are piling pressure on the central bank to raise interest rates and stop a market rout.

The lira pared earlier gains after the statement was issued by Erdogan’s office on Wednesday evening. The officials promised measures to reduce foreign-exchange and interest-rate pressure, but gave no details on policy measures that would be taken to accomplish it. They also promised to continue pro-growth policies that are increasingly unnerving investors.

"The statement from Erdogan underlines the disconnect between the government, the central bank and the market,” said Matthew Gittins, the head of sales at Spectra FX Solutions. “Erdogan is clearly loathe to see rates hiked more, but the market has over 200 basis points priced in over the next six months and the central bank is under pressure to provide an emergency rate hike.”

The lira trimmed gains to trade 0.3 percent higher at 4.3192 per dollar at 8 p.m. in Istanbul. When the news of the emergency meeting was announced -- and that central bank Governor Murat Cetinkaya would be attending -- the currency surged as much as 1.8 percent. The country’s benchmark stock index and government bonds rallied the most in three weeks.
Cetinkaya took part in the discussions with Erdogan along with bank and capital markets regulators, ministers for economic affairs, and the president’s economic advisers.

Turkey has been rocked by crumbling sentiment toward the most vulnerable emerging markets as concern over a global trade war and rising U.S. inflation expectations drive up the dollar and Treasury yields. The lira has slumped to successive record lows as investors worry that interest rates are too low given double-digit inflation.

The market was buying the hope that the meeting would yield a decision to raise rates, said Inan Demir, an economist at Nomura International Plc. If instead it consisted of Erdogan “asking for an explanation of why the lira continued to depreciate despite last month’s rate hike, then this is not necessarily promising for rate hike prospects."

Hike Bets

The last time Erdogan held an unscheduled meeting on the lira amid a market rout was in November 2016. The bank raised its late-liquidity window by 25 basis points one day later. Since then, it’s pushed average borrowing costs up by more than 550 basis points.

It’s not clear if verbal intervention alone will be enough to support the nation’s assets.

If the central bank doesn’t raise borrowing rates soon, “today’s gains will be lost easily,” said Emre Alcelik, a broker at Continental Capital Markets SA.

Snap Election

The currency has lost about 11 percent this year as the economy’s large financing needs make it one of the most vulnerable to the prospect of higher U.S. borrowing costs. A continued sharp depreciation would increase the chances of an emergency rate hike, said William Jackson, an emerging-market economist at Capital Economics.

Turkey’s central bank raised a key rate by 75 basis points last month, and has moved to boost lenders’ access to dollar liquidity, but the measures have proved insufficient to support the currency.

The market rout in Turkey has been compounded by fears that Erdogan may stand in the way of any substantial interest-rate increase before snap elections scheduled for June 24. Erdogan on Tuesday said the weakness in the lira does not reflect the state of the economy.

©2018 Bloomberg L.P.