Turkish lira drops on monetary policy fears

TURKEY’S lira touched a record low overnight, reflecting deepening investor concern about monetary policy and economic management after President Tayyip Erdogan appointed his son-in-law as finance minister this week.

The currency has lost more than a fifth of its value against the dollar this year, pushing inflation to its highest in 14 years and squeezing dollar-indebted companies across the economy.

Hours after being sworn-in with new powers as executive president on Monday, Erdogan appointed his son-in-law, Berat Albayrak, to the post of treasury and finance minister, exacerbating concerns the president will look to exercise greater influence over monetary policy.

Erdogan has described high interest rates as “the mother and father of all evil” and wants lower borrowing costs to keep cheap credit flowing to the construction sector and spur economic growth. Investors want to see decisive rate hikes to rein-in inflation that hit more than 15 percent last month.

“I believe we will see interest rates fall in the period ahead,” the Hurriyet newspaper cited him 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.”

The lira weakened as far as 4.9767 in Asian trade overnight, its weakest on record, before recovering. It was at 4.8145 at 10.28am GMT.

“Erdogan said yesterday interest rates must fall,” said a treasury desk trader at one bank. “This has been interpreted as a desire for a Turkish central bank rate cut at a time when additional tightening is expected and inflation has exceeded 15 percent.”

The central bank’s monetary policy committee, which has raised rates by 500 basis points since April in an effort to put a floor under the currency, next meets on July 24.

Albayrak’s appointment – he replaces the well-regarded former deputy prime minister Mehmet Simsek and the former finance minister Naci Agbal – has left the cabinet without any obvious investor-friendly ministers.

Markets have also been unnerved by presidential decrees this week that reduced term limits for central bank governors and deputy governors and made the president solely responsible for appointing members of the bank’s monetary policy committee.

Albayrak is a former energy minister. Before that, he was the chief executive of Calik Holding, a conglomerate seen as close to the ruling AK Party. – Reuters