Recep Tayyip Erdogan. Picture: REUTERS
Recep Tayyip Erdogan. Picture: REUTERS

Istanbul/Dubai — The Turkish lira and bonds declined to a new record after President Recep Tayyip Erdogan said he plans to take more responsibility for monetary policy if he wins an election in June.

That spooked investors, who worry about his dislike of high interest rates.

Erdogan’s comments are spoiling bets that a meeting at his palace last week with economic policy makers — including central bank governor Murat Cetinkaya — would open the way for rate increases.

Some traders had been positioning for an increase at an unscheduled monetary policy meeting.

The lira has weakened by 13% against the dollar this year, extending the biggest depreciation among emerging-market currencies after the Argentinian peso.

The yield on 10-year government bonds has surged to a record high.

Investors say double-digit inflation and the economy’s growing twin deficits require rates to move higher in order to stabilise the country’s assets against the prospect of higher US borrowing costs.

"Investors have been seeking a 100-basis-point to 150-basis-point emergency central bank hike to stabilise the lira, which may now be in doubt," Chris Turner, the head of foreign exchange strategy at ING in London, wrote in a note to clients.

The lira fell as much as 0.7% to a record low of 4.3981 to the dollar, before paring its decline to 0.5% at noon in Istanbul.

The rout comes ahead of an auction of two- and five-year government bonds by Turkey’s Treasury on Tuesday, a key test of investor appetite for one of the highest-yielding local currency notes in emerging markets.

Government bond yields surged across the curve, compounded by a lack of liquidity in the market.

The yield on two-year notes jumped 44 basis points, while five- and 10-year yields surged 50 basis points to push the latter to 14.4%.

Citigroup said on Monday that it had closed out a long dollar-lira recommendation, and had moved to a neutral stance on Turkish government notes from underweight.

"The problem is Erdogan’s interference and lack of confidence that the central bank has any independence to pursue policies of its own accord," said John Hardy, the head of foreign-exchange strategy at Saxo Bank. "The market will punish the lira."