Turkish lira shackled by election uncertainty – Bloomberg

Turkey’s lira may have gained against the dollar since the central bank began hiking rates, but a sustained rally will have to wait until after elections, Bloomberg reported, citing economists.

The central bank has raised rates by 425 basis points over the past month to reverse a record decline in the currency. Still, doubts remain about economic policy after President Recep Tayyip Erdoğan pledged to lower interest rates following the polls on June 24, Bloomberg said.

“It won’t be all in for investors,” said Petr Krpata, a London-based strategist at ING Groep NV. “There is still a degree of uncertainty about the policy mix.”

Markets haven’t forgotten Erdoğan’s ill-advised pledge on rates, made in London last month, which is based on an unconventional view that higher interest rates spur inflation, Bloomberg’s Constantine Courcoulas said.

The lira offers the best returns in emerging markets after the crisis-hit Argentinian peso and the currency could now test 4.4 per dollar, Krpata said.

The lira slumped to a record low of 4.92 against the U.S. currency last month, forcing the central bank into an emergency rate hike of 300 basis points. Policymakers followed that up with a 125 basis-point increase in the benchmark rate to 17.75 percent this week, a bigger hike than economists expected.

Concern about a political deadlock after elections – Erdoğan is favourite to win the presidential elections but his ruling Justice and Development Party (AKP) could lose its parliamentary majority, according to polls – is one of many risks that stand in front of gains for the lira, Courcoulas said. Despite increases since May, the currency is still down about 15 percent this year.

“We do not expect a meaningful relief rally,” JPMorgan Chase analysts including Yarkin Cebeci said, according to Bloomberg. “The question in the minds of many is whether this is a move to secure lira strength in the run up to the elections (and will be negated either by rate cuts or other measures after the elections) or a determination to restore economic imbalances and to tame inflation for good.”

Turkish ministers have made successive statements over the past two weeks pledging to tighten fiscal policy after the election and to carry out much-delayed economic reforms. Inflation accelerated to 12.2 percent in May from 10.9 percent the previous month, the Turkish Statistical Institute said on Monday.

Central bank rate hikes “will go a long way to restoring investor confidence in Turkey’s ability to stay ahead of the curve,” according to Paul Greer, a fund manager at Fidelity International. Still, it remains uncertain whether the future government will back up the rate increases with tighter fiscal policy, he said.