Erdogan says his patience on central bank policy has limits

Roman Schwartz
September 16, 2018

Recent currency fluctuations in Turkey have political reasons, President Recep Tayyip Erdoğan said Friday, describing the surge in US dollar/Turkish lira rate in August as an "evidence of an attempted economic assassination".

In a bid to shore up the Turkish lira, Erdogan's government issued a decree on Thursday banning the use of foreign currency in the sale and renting of property and the leasing of vehicles.

Turkey's woes are also part of wider jitters in developing countries as investors pull their money out of the fast-growing - but often fragile - emerging economies to return it to safer markets like the U.S. The reason for this was the reported record inflation of almost 18%. It later shed some of those gains but was still up 3.0 percent in value at 6.14 to the dollar.

Investors have focused their concerns on Ankara following Erdoğan's re-election and his grab for control of the country's economy.

In an overhaul of the Turkiye Wealth Fund, seven new members were appointed, including Erdogan's son-in-law, Treasury and Finance Minister Berat Albayrak, as the deputy chairman.

Washington is pressing Turkey to release a detained American pastor. In his speech, Erdoğan criticized the interest rate hike of the Central Bank.

Turkish lira implied volatility gauges fell to their lowest levels in more than a month on Friday, as sentiment continued to improve.

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Economists have warned of a possible recession in Turkey after a slowdown in the second financial quarter of 0.9 percent, compared to 1.5 percent in the first quarter of this year.

Addressing his ruling party's officials Friday, Erdogan said: "Here you go, have your independence". In fact, he calls himself the "enemy of interest rates", and was even pushing for lower rates as recently as Thursday morning. "My sensitivity to interest rates is the same, and that's not a crisis, it's a manipulation, do not be mistaken, that's going to be overcome", added the Turkish President.

With this interest rate hike, Turkey has become the third country with the highest political interest rates after Argentina and Suriname.

Inflation accelerated to nearly 18 per cent in August, eroding the real yield on the currency and leaving it exposed to higher borrowing costs in the U.S and already-shaky investor appetite for emerging market assets.

The central bank said in its statement that there was still an upside risk to Turkey's inflation outlook from what it called a deterioration in pricing behavior, despite weaker domestic demand conditions. "For a country that is in really deep distress like Turkey, what is important is to restore some of the independence of the central bank and take measures to stem the currency's fall".

It said: "Accordingly, the committee has made a decision to implement a strong monetary tightening to support price stability".

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