Erdoğan power unnerves investors ahead of key rates decision

Turkish President Recep Tayyip Erdoğan's increasing control over economic and monetary policy is unnerving investors ahead of a key central bank meeting on interest rates.

A promise by policymakers to “reframe” monetary policy last week has built confidence in financial markets that they will raise interest rates substantially at Thursday’s meeting. But lingering suspicion remains that any hike will fall short of expectations, leading to a further sell-off in the embattled lira.

In a latest move to tighten his grip over the economy, Erdoğan, who has been vocal in opposing higher interest rates, made himself chairman of the country’s sovereign wealth fund on Wednesday and replaced all of its directors. Early on Thursday, he barred Turks from using foreign currency in property and car-leasing contracts in a latest effort to steady the lira.

But foreign investors say that the only way to reverse the currency’s 40 percent slide this year is to raise the benchmark interest rate of 17.75 percent decisively. Estimates focus on an increase of some 300 basis points, which take into account the political pressure that the central bank faces from the government.

The lira fell 0.5 percent to 6.37 per dollar at 11:56 a.m. in Istanbul, partly reversing gains on Wednesday that marked a two-week high for the currency.

Michael Metcalfe, head of macro strategy at State Street Global Markets, told the Financial Times on Thursday that the central bank meeting marked a “watershed moment” as emerging markets sought to prevent contagion from Turkey and Argentina, which is also in the midst of its own currency crisis.

 

Goldman Sachs Asset Management is calling on the central bank to carry out a sizeable rate hike to restore its credibility. Many economists say it might need to take further action going forward to ensure the lira reverses course.

The bank hasn’t raised its benchmark rate since June, preferring to tinker with other lending rates to bring the average cost of funding to 19.25 percent. Its muted response to the sell-off in the lira has coincided with Erdoğan’s re-election as president in a vote on June 24. Erdoğan gave himself the power to appoint the central bank’s governor and his deputies in early July, and reduced their terms in office to four years from five.

The lira’s slump is also hurting economic growth just as Erdoğan and his governing Justice and Development Party prepare to fight local elections, which are due in March but could be brought forward. Quarter-on-quarter growth of 0.9 percent in the three months to June, reported on Monday, is a precursor to an economic contraction and a possible full-blown recession, economists say. Higher interest rates, while helping the lira, could deepen the downturn.

Former Turkish central bank governor Durmus Yilmaz has joined investors in calling for a substantial rate hike, pointing to accelerating inflation. An increase in the order of 150 basis points just won’t do the trick and could spark a further slide in the lira, he said in comments carried by news website Sputnik.