Erdogan Scares Off the Few Friends the Lira Had

Erdogan Scares Off the Few Friends the Lira Had

(Bloomberg Opinion) -- What a waste of 500 basis points of rate hikes. Just when it seemed Turkish President Recep Tayyip Erdogan may have learnt the errors of his interfering ways, he’s back at it again, vowing to “deal with interest rates” if elected. And the Turkish lira has duly voted with its feet.

Erdogan Scares Off the Few Friends the Lira Had

The first round of the presidential elections, as well as general elections, are on Sunday, June 24. There could be a subsequent round on July 8.

The question of how independent the central bank will be after the vote is back again in the spotlight. If Erdogan were to order interest rates lower it would have a devastating effect on the currency — and it’s already about 25 percent weaker versus the U.S. dollar this year. Inflation is on an upward tear, having risen to 12.15 percent in May from 10.85 percent the prior month.

Erdogan Scares Off the Few Friends the Lira Had

In any other economy this would really make it likely the central bank will need to hike rates again — and indeed, Turkey’s was careful at its June 7 meeting to retain a hawkish bias. Erdogan has destroyed this. Any threat to policy makers’ freedom to take such painful but necessary action is toxic for the currency.

The uncertainty surrounding the vote has kept investors away. Normally, the passage of such a key event would offer grounds for them to pile back in. However, the wisest course in Turkey may be to keep away. There is a real question as to what happens after the election, whatever the outcome.

A hung parliament is a possibility. If the ruling AK party loses its majority in the legislature, that may just mean Erdogan removes it from the equation. Any semblance of democracy or rule of law would die.

About the most promising thing that can be said for the lira’s prospects is that anyone who wanted to reduce exposure by now has done so.

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