ISTANBUL (July 12): 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% 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 1028 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%."
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.
"President Erdogan's grip on the central bank looks set to strengthen," Jason Tuvey of Capital Economics said in a note this week. "The pace at which he is moving to tighten his grip is alarming and, in response, Turkish financial assets have come under pressure."
Erdogan's son-in-law Albayrak, 40, is a former energy minister and, before that, was the chief executive of Calik Holding, a conglomerate seen as close to the ruling AK Party.
Albayrak said the central bank is independent and will do whatever is necessary according to economic realities and market conditions, state-run Anadolu news agency reported on Thursday.
"We will support the implementation of a monetary policy which is more predictable, simple and decisive, in line with the central bank's targets," Anadolu quoted Albayrak as saying.
Ratings agency Moody's also sounded concern about the outlook for the independence of the central bank. Challenges to the effectiveness of the central bank are "most clearly credit negative at this point" it said in a note.
"The changes to the governance of the central bank suggest that its resolve to tighten monetary policy to take the heat out of Turkey's economy, such as it is, may weaken rather than strengthen in the coming months," Moody's said.
The lira sell-off also has big implications for Turkey's companies, and its banks. For years, Turkish firms have been borrowed, at much lower interest rates, in dollars and euro, often to help fund expansion at home. But the currency's decline has driven up the cost of servicing those loans and forced major companies into debt restructuring.
Investors have hammered bank stocks this week, reflecting fears that lenders could face a coming wave of bad debts. Turkish firms had US$225 billion in long-term, overseas borrowings as of April, almost all in dollars or euros, central bank data shows.
The main share index fell half a percent, adding to a 5% drop on Wednesday, and bringing its losses this year to more than 20%. Banking stocks were little changed after shedding more than 9% on Wednesday — their worst day for five years.
The yield on the benchmark 10-year bond rose to 18.57% from 18.37% on Wednesday.