Speaking on the eve of a central bank interest-rate decision, Erdogan outlined the stark dilemma facing monetary officials: act to defend the currency with an increase in borrowing costs or bow to the wishes of an increasingly commanding leader who’s purged more than 100,000 adversaries since a failed coup in July, Bloomberg reported.
“Erdogan’s speech about interest rates is ominous for anyone looking for an early hike,” Paul McNamara, a fund manager at GAM Ltd in London who’s been “aggressively” underweight Turkish assets for months, said via e-mail. “But it’s a brave person who doesn’t comply with Erdogan’s wishes in Turkey these days.”
Erdogan gave no indication of what intervention he was considering. He complained of obstacles to financing from Turkey’s own banks, urging them to lower rates and saying they made investment more difficult. The president was set to chair a meeting later Wednesday of top economic officials, after a meeting by the same group under Prime Minister Binali Yildirim on Friday failed to calm markets.
State Power
“Personally and politically, I’ve never found it right to use the power of the state for an intervention in the market," Erdogan said at a signing ceremony between the Borsa Istanbul and the Islamic Development Bank in Istanbul. “But the market also has to continue on a path that doesn’t open the way for intervention against it."
A growing minority of private economists has been predicting that the lira’s plunge will force the central bank to defy Erdogan’s low-rate preference with the first increase to its benchmark rate of 7.50 percent in almost three years. The president has led a chorus of voices in government who speak of interest rates as tools of oppression used by foreign powers to keep Turkey’s economy weak.
“It does seem that the central bank is under pressure to let the lira go,” Roxana Hulea, a strategist at Societe Generale in London, said by e-mail on Wednesday. “The central bank could still make an effort to avoid a collapse in market confidence, possibly via a small 25 basis-point hike in the repo rate, hawkish rhetoric and amendments to reserve requirements.”
Ottoman Bankers
Erdogan told his audience in Istanbul Wednesday that the Ottoman Empire, the predecessor of modern Turkey that once ruled much of the Islamic world, was “sucked dry by bankers." The backdrop before his speech at the Istanbul stock exchange included verses from the Koran on interest rates, one of which, in Turkish translation, compared those who employ them to a person driven insane by the devil.
The lira, which weakened 9 percent against the dollar this month, extended losses to new records as Erdogan spoke, falling as much as 1 percent to 3.4166 per dollar. Yields on two-year sovereign lira debt jumped by the most since February, to 10.95 percent, higher than they were before the bank began a rate-cutting cycle in March. Yields on 10-year notes rose 24 basis points to 11.38 percent, highest on record. The Borsa Istanbul 100 Index slid 1 percent.
Short Lira
JPMorgan Chase & Co. said Wednesday that the lira was its highest conviction regional short trade, citing political risk before an expected referendum next year on increasing Erdogan’s powers, and Turkey’s vulnerability to higher U.S. yields. The currency will probably weaken to 3.50 per dollar by year-end and to 3.65 by the end of 2017, analysts including Anezka Christovova said in the report.
Officials in Ankara have argued that the sell-off in Turkey was in line with a global shock hitting emerging markets, driven by Donald Trump’s election victory on Nov. 8 and higher U.S. bond yields. Still, that volatility has led some investors “to expect a large interest rate hike tomorrow,” Koon Chow, a strategist at Union Bancaire Privee Ubp SA in London who is underweight Turkish bonds, said by e-mail. “I think the central bank will keep rates on hold and let the lira continue to fall to keep supporting growth.”
Erdogan said that he reserves the right to criticize the central bank because he’s the one who has to answer to his people. He also reiterated a direct call to the nation’s private lenders to lower their rates to support investment and trade, and boost employment.
“Please bring rates down to a more reasonable level," he said, addressing private sector banks. “I have nothing to say against the central bank’s autonomy or independence, but I also won’t consent to having my people’s rights and resources wasted through high real interest rates."