Lira Rises as Prospect of Central Bank Action Hangs Over Market

(Bloomberg) -- Turkey’s lira extended a rally against the dollar as a second unscheduled meeting between economic policy makers added to speculation the central bank may take action to stem this month’s rout.

The lira has gained more than 2 percent over two days after slumping more than 11 percent against the dollar to successive record lows this year. The central bank’s Governor Murat Cetinkaya will hold a follow-up meeting with regulators on Thursday after President Recep Tayyip Erdogan summoned officials to his palace on Wednesday to discuss the currency, according to a senior government official.

The market is assessing whether the summits between top-level economic officials will pave the way for interest-rate increases. While a late-night statement following the meeting held by Erdogan on Wednesday offered few signs of imminent action, it comes after a string of measures announced by the central bank this week, and is fueling speculation policy makers are getting uncomfortable with the currency’s volatility.

“This meeting could be yet another important step toward an emergency meeting when a proper hike could be delivered,” said Piotr Matys, a strategist at Rabobank in London, who says an increase of at least 200 basis points is needed.

The central bank is next scheduled to meet on June 7 and Turk Ekonomi Bankasi AS says that the market is pricing in “sizeable” interest-rate hikes before that. The lira gained 1.3 percent to 4.2320 per dollar by 3:30 p.m. in Istanbul, after plunging to a fresh record low on Wednesday, while the yield on 10-year government bonds fell as much as 28 basis points.

On Wednesday the central bank increased the size of its non-deliverable foreign exchange and daily swap auctions, and on Monday it lowered the maximum amount of bank reserves that need to be held in foreign currency in a bid to boost liquidity available to local lenders.

Turkish markets have been hurt by weakening emerging-market sentiment on concerns over a global trade war and a stronger dollar, with the economy’s large financing needs making it vulnerable to the prospect of higher U.S. borrowing costs. The rout has been compounded by fears that Erdogan may oppose any rate increase before elections on June 24.

“We continue to think it is not going to be possible to wait -- under the circumstances -- till the next regular Monetary Policy Committee meeting,” said Murat Ucer, a strategist at Global Source Partners in Istanbul.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Scott Hamilton

©2018 Bloomberg L.P.