As Turkey markets sink, speculation rises

istanbul — Desperate measures are in the air in Turkey: trading rooms are awash with talk of a bailout by the International Monetary Fund and potential capital controls. But there’s a vacuum at the core.

The central bank and government have been largely silent as the currency plummeted to record lows and the US imposed sanctions and threatened more. The lira slipped for a seventh day against the dollar after falling by the most in a decade on Monday, while the yield on 10-year bonds surged above 20 per cent to an alltime high. “It will remain like this until the central bank commits unconditionally to hike rates and keep them high until inflation has turned,” Henrik Gullberg, a strategist at Nomura International Plc, said by email.

Yet the radio silence from Ankara — a result of June elections that gave President Recep Tayyip Erdogan almost absolute power in policy making — is deafening.

Erdogan is a staunch critic of higher rates and investors worry that he may be standing in the way of any further rate increases.

The lira is buckling under the weight of one of the widest currentaccount deficits in emerging markets and inflation is spiraling ever higher. As of July it was running at more than three times the central bank’s target, driving the real policy rate to below 2 per cent, the lowest since December.

The lira weakened 0.5 per cent to 5.3548 per dollar as of 13:21pm in Istanbul after sinking as much as 6.7 per cent to the dollar on Monday, taking the currency’s slide to 29 per cent so far this year. —

It will remain like this until the central bank commits unconditionally to hike rates and keep them high until inflation has turned Henrik Gullberg,

Strategist, Nomura International Plc