Turkish President Tayyip Erdogan called for lower interest rates on Friday and described them as the "mother and father of all evil", triggering a fresh slide in the lira as investors worried about the central bank's ability to rein in high inflation. The lira weakened as far as 4.3080 against the dollar after his comments, from a close of 4.2374 on Thursday. On Wednesday it had hit a record low of 4.3780 before rebounding strongly the following day.
"If my people say continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates," Erdogan said in a speech to business people in Ankara, referring to snap elections on June 24. "Because my belief is: interest rates are the mother and father of all evil." The central bank last month raised its late liquidity window rate, which it uses to set policy, to 13.5 percent from 12.75 percent.
Inflation stood at 10.85 percent year-on-year in April, far above the bank's target of 5 percent. Thursday's rebound in the lira was driven by news that Erdogan had held an unscheduled meeting of his economic team to address the sell-off in the currency, which has fallen more than 11 percent against the US currency this year.
At the meeting, Erdogan and the economic team agreed to take measures to help shield the lira. Turkey's central bank governor and the general managers of the largest state lenders, Ziraat Bankasi, Halkbank and Vakifbank attended Thursday's meeting. Investors appear to have been hoping for some additional tightening measures from the central bank, which added liquidity to shore up the lira this week. Its next policy-setting meeting is scheduled for June 7.
"I see it likely that the central bank will take action ahead of the monetary policy meeting to decrease its inflation outlook and the increasing volatility in the lira before the June 24 elections," said Isik Okte, Strategist at Teb Yatirim/BNP Paribas said.
"I think, a minimum of a 200 bps rate hike and a simplification step will come at the same time." Cemil Ertem, one of Erdogan's top economic advisers, said on Friday the central bank would continue to use all instruments to address exchange rate volatility, but that forex rates were not the only factor determining policy.
The yield on the benchmark 10-year government bond stood at 13.59 in spot trade and rose to 13.66 in Monday-dated trade. The yield briefly spiked to its highest for at least eight years on Wednesday, topping 14.2 percent. Borsa Istanbul's bluechip index fell 0.7 percent to 101,643 points.
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