Lira Resumes Slide in Tumultuous Week as Erdogan Seeks Rate Cuts

(Bloomberg) -- The lira extended a slide after Turkish President Recep Tayyip Erdogan said he will emerge victorious in his fight against interest rates after elections next month.

The currency slumped to a session low against the dollar after Erdogan said Turkey needs to target double-digit growth, approaching a record reached Wednesday. Speculation that the central bank will raise policy rates after Erdogan met with top economic officials this week had helped the lira erase much of its losses.

“Interest rates are the reason for inflation,” Erdogan said in a speech to businessmen in Ankara. “Inflation is not the cause, it’s an outcome. We have to pull down interest rates,” he said.

Turkey will introduce more economic incentive packages this year, Economy Minister Nihat Zeybekci said in an interview with state-run Anadolu Agency on Friday. Economic growth will be around 6 percent in 2018, he said, compared with 7.4 percent in 2017.

Market Turmoil

The lira has tumbled amid concerns that a strong U.S. currency would trigger capital outflows from emerging markets and the slide has been compounded by fears that Erdogan may oppose any rate increase before elections on June 24, even amid signs that the economy is overheating.

The lira weakened 1.9 percent to 4.3111 per dollar as of 5:23 p.m. in Istanbul after strengthening 2.4 percent in the previous two days. The rout this week saw the pair touch a record 4.3743 Wednesday.

“So far it is just rhetoric,” said Guillaume Tresca, an emerging-market strategist at Credit Agricole SA in Paris, referring to Erdogan’s comments. The central bank will continue to tighten with a mild rate hike, “something just to calm down markets,” he said. “More worrying are the latest pro-growth statement from Erdogan and Zeybekci comments. It is exactly what we don’t want to see.”

Tresca said he expects the central bank to raise interest rates by 100 basis points in June, 75 basis points in July and 75 basis points in September, though even that may not be enough to reverse the lira’s slide.

Morgan Stanley has raised its forecast for rates. Analysts say they now expect a 150-basis-point increase by June, up from 50 basis points penciled in earlier, and say that the central bank would hold an interim meeting if the currency comes under pressure again.

“If steps are not taken soon, market pressure for action will likely re-emerge, given the heightened expectations that have been created by the recent summit,” Morgan Stanley analysts including James Lord wrote in a report to clients.

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, Keith Jenkins, Neil Chatterjee

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