Well, that didn’t last long: the Turkish lira (TRY) weakened more than 4% on May 24 as the previous day’s emergency interest rate hike of 300 basis points (bp) began to look like little more than a temporary fix for Turkey’s bruised and battered currency.

The TRY had sunk to 4.7867 to the dollar by 18:20 Istanbul time having started the day on 4.5791 following the long-awaited central bank tightening that was brought in on May 23 with the currency headed for five-to-the-dollar (the regulator sat up when it got as far as 4.9294 in overnight Asian markets trading after Japanese traders gave up on their long lira positions).

Investors are clearly not convinced that Turkish President Recep Tayyip Erdogan—an economic populist who is an advocate of securing even cheaper money to drive growth despite Turkey’s overheating economy, surging current account deficit and double-digit inflation—will preserve the independence of the central bank’s monetary policy committee should he be returned to power as the country’s first ever executive president in the June 24 snap elections. He may have been conciliatory on this point after Turkey bowed to the markets with its interim rate increase, but the ‘unchained’ interview he gave to Bloomberg TV in London at the start of last week will linger long in the minds of those who’d rather stick to classic monetary theory.

“[The emergency interest rate hike of 300bp to 16.5%] might prove insufficient to stabilise the currency, as concerns about monetary policy-making in the post-election period will remain... given the president’s vow to tighten his grip on economy policy,” Gokce Celik, chief economist at QNB Finansbank, wrote in a note to clients.

The fate of the lira, down around 20% against the dollar in the year to date, and 30% since last September, is increasingly being seen as a danger to Erdogan’s re-election chances. His rivals for the throne—which will come with sweeping powers, the scrapping of the post of prime minister and the diminishing of parliament’s powers—are increasingly pointing the finger at him for economic mismanagement.

“Confidence shattered”
The rate increase “won’t trigger a sustainable reversal in USD/TRY after confidence has been shattered over the past few weeks,” Piotr Matys, an emerging-market currency strategist at Rabobank in London, told Bloomberg. “More is required to restore confidence among investors and the central bank may have to tighten monetary policy further perhaps as soon as on June 7 [at its scheduled policy meeting].”

The direction the TRY will take in the days ahead is also very much dependent on the external environment. If the dollar stutters, emerging-market currencies may rebound, but if it does not—note the dollar was buoyed as the US Fed on May 24 indicated a rate hike is likely at its June policy meeting—then the lira may well remain among the weakest currencies of the developing nations.

Foreigners were net sellers of $638mn of Turkish bonds last week, the highest figure recorded since 2016.

On May 24, the yield on Turkey’s 10-year domestic bonds fell to 14.28% from 14.69% on the previous day while 2-year domestic bonds stood at 16.63% falling from 16.71%. The Istanbul stock exchange’s benchmark index, the BIST-100 closed down 0.74% at 101,138.08.

In another move to assist the ailing lira, the central bank on May 23 raised the maximum total amount of forward foreign exchange sale positions to $8bn from $6.15bn for the second quarter of this year, 

Less than clear
Following the emergency hike, investors were concerned that both Erdogan and the central bank were less than clear in their comments on what lies ahead in monetary policy. Erdogan stated in a televised speech to former lawmakers in Ankara that “in the new government system, we’ll continue to abide by the global governance principles on monetary policy.”

He added that “financial discipline will continue and the necessary things will be done for financial stability” but he also said that the TRY’s volatility did not reflect Turkey’s economic reality and, in a familiar reference to conspiratorial foreign market players supposedly out to undermine Turkey’s economy, he warned that he would not let “global governance types” ruin the country.

Turkey’s economy delivered more growth than China’s last year, registering a GDP expansion of 7.4%. The markets want clear action to cool it down but on this point Erdogan only vaguely commented that “we will definitely take measures to lower inflation and the current account deficit in a very different way after the elections”.

Adding to investor concern, the central bank, in its statement on the interim hike, dropped its usual wording that “further monetary policy tightening will be delivered, if needed”, noted Reuters. That sowed some concern that it may not increase rates at its next scheduled policy meeting.

Deputy Prime Minister Mehmet Simsek, the Cabinet minister in charge of the economic team who unlike Erdogan is seen as unmistakeably “market friendly”, as well as Central Bank of the Republic of Turkey governor Murat Cetinkaya, are to travel to London next week to meet with investors.