Turkish Lira slumps to record low

[ElectricianPete]

ISTANBUL—The Turkish lira slumped to a record low Wednesday against the dollar after President Recep Tayyip Erdogan took a swipe at the country’s central bank following its decision to cancel an emergency meeting to cut interest rates.

“It is called an independent institution. Unfortunately, this is the point where we end up when it is independent. We need to be at a better point and succeed in this,” Mr. Erdogan said at a meeting with a confederation of Turkish tradesman and craftsmen. He repeated his thesis that high interest rates are the cause of high inflation.

He urged the central bank to ease borrowing costs to boost economic growth and attract investments.

After his comments, the lira dropped 2%, with the dollar jumping to 2.4570 lira, breaching its previous record high of 2.4479 on Friday. Meanwhile, the yield on two-year benchmark government bond yields rose to 7.82% from 7.19% earlier Wednesday. Bond yields rise as prices fall.

Mr. Erdogan’s comments came after Turkey’s banking watchdog late Tuesday transferred control of Bank Asya to a state-run fund, raising concerns over the institutional independence in Turkey.

“Inflation indicators continue to improve in recent months owing to the implementation of cautious monetary and liquidity policies,” central bank policy makers said Tuesday. “The Monetary Policy Committee will assess the inflation outlook in detail at the regular meeting which will be held on the 24th of February.”

Erdem Basci, governor of Turkey’s central bank, last week had said he might convene an emergency meeting to cut interest rates on Feb. 4 if the inflation drops more than 1% in January, but the central bank Tuesday ruled out such a meeting despite mounting government pressure, as the inflation rate dropped less than anticipated in January. The central bank’s early rate cut signal jittered investors’ nerves, sending the lira to record lows against the dollar last week amid a broader emerging markets sell off.

The government data showed Tuesday that Turkey’s annual inflation slowed to 7.24% in January from 8.17% in December, missing the benchmark Mr. Basci had set to spur a rate cut.

“Somehow, Turkey had become the new darling of global emerging markets. Fast forward a month or two and this is now all over,” said Benoit Anne, the head of emerging-markets strategy at Société Générale . “So what happened? Essentially, a big policy error on the part of the central bank in the context of serious political pressures. The emergency meeting saga caused tremendous damage to the credibility of the policy framework and to investor confidence. I am in the U.S. visiting investors right now, and nobody is bullish on Turkey any more.”