Turkey’s lira extended its record slide after Treasury and Finance Minister Mehmet Simsek emphasized his backing for a gradual shift in economic policies.
(Bloomberg) — Turkey’s lira extended its record slide after Treasury and Finance Minister Mehmet Simsek emphasized his backing for a gradual shift in economic policies.
The currency dropped as much as 3.2% against the dollar on Friday, before paring losses. It dropped 5.7% after a smaller-than-expected interest rate increase on Thursday and has depreciated 17% this month.
The lira is vulnerable as Turkish authorities face painful choices to restore economic credibility and reduce inflation. While the closely managed currency has been allowed to weaken more significantly since President Recep Tayyip Erdogan’s reelection last month, traders are still expecting more depreciation, derivatives show.
Simsek, the former investment banker who returned as Turkey’s economic czar this month, doubled down on his “gradual” change message on Friday, echoing central bank comments from Thursday.
“We are determined to attaining price stability, financial stability and macroeconomic stability,” Simsek said, according to state-run Anadolu Agency. “The path toward price stability is going to be gradual but steadfast.”
The lira traded 0.6% weaker at 25.0688 per dollar as of 5:18 p.m. in Istanbul. The Turkish currency is headed for a 16th week of declines, its longest losing streak since 1999.
The central bank raised the one-week rate from 8.50% to 15% on Thursday, compared with median expectations for the rate to be moved up to 20%. The slower-than-expected tightening has led to a steep money-market curve, where the one-month deposit rate is at 27% and the three-month rate at 40%.
“The hawkish and committed press statement was not enough to convince investors and was outweighed by the under-delivery on interest rate hikes,” said Christian Wietoska, a strategist at Deutsche Bank AG. “This does not make it easier for the central bank, and risks of chasing the market – rather than taking the initiative over the upcoming months – have increased.”
Turkish State Banks Hold off Lira Defense in Policy Shift Signal
Simsek said in a Twitter post on Thursday that he favored a free-floating foreign-exchange regime. “Policy framework based on the principles of market economy, free foreign-exchange regime and open economy will ensure significant capital inflow to Turkey,” he wrote.
Goldman Sachs Group Inc. economists Clemens Grafe and Basak Edizgil said the gradual change comments suggest that the central bank is likely to allow further depreciation to help rebalance the current account. “However, it will be difficult to fully float the lira without having an interest rate anchor,” they wrote in a research note.
While the lira remained on the back-foot, the gradual approach was liked by stock investors, with the shares of Istanbul-listed banks jumping by as much as 5.2% on Friday. Slow changes could help lenders cope with the low-yield government bonds they were forced to hold.
“The statements by the central bank and Mehmet Simsek signal that the policymakers don’t want a shock in financial markets and extra losses in bank balance sheets,” said Enver Erkan, chief economist at Dinamik Yatirim in Istanbul.
–With assistance from Kerim Karakaya.
(Updates with latest lira movements in second and sixth paragraphs.)
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