Turkish President Recep Tayyip Erdogan's threats to take greater control of monetary policy spook markets
Turkey's embattled currency, the lira, on Wednesday hit new historic lows against the US dollar after Fitch ratings agency expressed concerns over the central bank's independence in the wake of comments by President Recep Tayyip Erdogan.
Fitch said that comments by Erdogan last week that he plans to have a greater say in monetary policy if he wins June elections raised the possibility of economic policy becoming more unpredictable after the polls.
In an interview with Bloomberg TV while on a visit to London, Erdogan signalled he wanted to take greater control over monetary and economic policy even if this "may make some uncomfortable".
"An explicit threat to curb the central bank's independence increases risks to the policymaking environment and to policy effectiveness," Fitch said in a statement.
It warned that the president's comments raised the possibility of "overall economic policy, not just monetary policy, becoming less predictable after the elections."
After the statement, the Turkish lira hit 4.65 against the dollar after 1pm GMT, a loss of 1.7 percent before it slightly pared back some of its losses to reach 4.63 before 2pm GMT.
On Wednesay, the currency dropped as much as 2.8 percent against the dollar to an all-time low of 4.7989 in Asia-Pacific trading, before recovering slightly to 4.75 against the dollar.
The lira has lost over 14.9 percent of its value against the greenback in the past month
Erdogan has called for low interest rates to ensure strong growth.
And he often calls for lower rates to help reduce double-digit inflation, a position that flies in the face of economic orthodoxy. Inflation is currently at 10.85 percent.
The bank's next monetary policy meeting is on June 7, but there have been calls on the bank by economists to hold an emergency meeting before then and implement a sharp rate hike before it's too late to have any effect.
Fitch, which like other global ratings agencies currently assesses Turkish sovereign debt as deep into junk status, warned that erosion of the central bank's independence would put "further pressure on Turkey's sovereign credit profile."
It said that after the elections "tougher global financing conditions will test the vulnerability created by Turkey's large external financing requirement."
“The Turkish lira is an outlier now,” said William Jackson of Capital Economics, speaking to the Financial Times.
“That is more worrying than when it is just doing a bit worse than other emerging markets …Given that this is an economy with high inflation and large foreign exchange debts, it cannot tolerate sharp falls in the currency that others might be able to.”