ISTANBUL: Turkey's lira hit a five-week low against the dollar on Wednesday after the latest round of government criticism of central bank policy, but made up some ground on expectations of monetary easing in Europe.
Prime Minister Tayyip Erdogan said on Tuesday he hoped the central bank would lower interest rates more after a cut in May, refuelling concerns over political interference in monetary policy.
The bank jacked up rates in January to defend a tumbling lira but has been under pressure for cuts from Erdogan, who is keen to maintain growth ahead of an August presidential election in which he is expected to run and parliamentary polls in 2015.
"The central bank managed to claw back its credibility with the January hike but there's a real risk that it will succumb to government pressure," said William Jackson, emerging markets economist at Capital Economics.
The lira weakened to 2.1275 to the dollar and later firmed up to 2.1245 on the widespread view that the European Central Bank will ease policy on Thursday. But the currency remained weaker than its 2.1185 level on Tuesday evening.
The ECB is expected to respond to low euro zone inflation and sluggish growth on Thursday with an aggressive set of easing measures. Those expectations have raised demand for high-yielding emerging assets.
Turkey's 10-year benchmark bond yield rose to 9.23 percent from 9.16 percent on Tuesday. Turkey's 2-year benchmark bond yield ended the day at 8.52 percent from 8.51 percent on Tuesday.
The main Istanbul share index closed down 0.55 percent at 78,384.74 points.
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In late January, Turkey's central bank ramped up all of its main rates at an emergency meeting in a bid to halt a dramatic slide in the lira amid an emerging market sell-off.
Since then Erdogan and some of his ministers have repeatedly called on the bank to lower rates again.
One problem for the central bank, however, is that Turkey runs a huge deficit on its current account, the broadest measure of its trade with the rest of the world, and therefore depends on foreign capital inflows to help keep its finance steady.
Highlighting that problem, data on Wednesday showed that automotive sales, which make up about 14 percent of Turkey's overall exports, tumbled 28.7 percent in May having declined every month this year.
Capital Economics's Jackson said the risk was that the central bank might cave in to government pressure, which would only exacerbate its deficit problem.
"This could mean that investors are more reluctant to finance its large current account deficit and ironically that rates need to be higher," he said.
Still, January's huge rate hikes could hit growth in the broader economy, which is already slowing after a decade of unprecedented expansion.
In announcing ratings actions on 11 Turkish banks late on Tuesday, ratings agency Moody's said the Turkish economy would grow 2.9 percent in 2015, compared to April's forecast of 3.0 percent.
Moody's forecast for 2014 growth remained at 2.5 percent. The government is expecting growth of 4 percent this year, although most economists see that as optimistic.
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