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Turkish lira rebounds from record lows
July 13, 2018
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ISTANBUL: The Turkish lira hit a record low on Thursday after President Tayyip Erdogan’s latest comments on interest rates rattled investors, before rebounding.

Turkish assets have taken a hammering this week following Erdogan’s moves to cement his power under a powerful new executive presidency. He has installed his son-in-law as finance minister.

Erdogan’s comments to a newspaper that he saw interest rates falling in the period ahead triggered a fresh bout of selling by investors already concerned about the central bank’s inability to tame double-digit inflation in an overheating economy.

The lira weakened to a record low of 4.9767 against the dollar in overnight Asian trade before recovering to trade 1.7 percent firmer on the day.

But Turkish stocks tumbled 1.8 percent to their lowest level since April 2017. Turkish five-year credit default swaps rose to a near one-month high of 337 basis points and dollar bonds sold off further, with some issues losing as much as 0.7 cents.

Ratings agency Moody’s on Thursday sounded concern about the outlook for the independence of the central bank, given changes this week that make the president solely responsible for appointing members of the bank’s monetary policy committee, and shortened the length of the central bank governor’s term.

Challenges to the effectiveness of the central bank are “most clearly credit negative at this point”, Moody’s said in a note.

“The changes to the governance of the central bank suggest that its resolve to tighten monetary policy to take the heat out of Turkey’s economy, such as it is, may weaken rather than strengthen in the coming months”, it said.

Turkey’s central bank will next meet on July 24 but investors fear political pressure will prevent it from taking action. Finance Minister Berat Albayrak said it was “unacceptable” for central bank independence to be the subject of speculation.

“As a house we are pretty negative about the changes in the Turkish government and very sceptical that the central bank will maintain a tight policy for as long as they need to,” said Paul Fage, senior emerging markets strategist at TD Securities, adding that the timing of Erdogan’s latest comments was “just awful”.

“We have many instruments. I believe we will see interest rates fall in the period ahead,” a newspaper cited the president as telling reporters after his first foreign trip following the inauguration.

“I am sure not just our state banks but our private banks will shoulder responsibility if necessary.”

Reuters

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