A sell-off in Turkey's lira accelerated, as investors knocked the ailing currency to record lows after rating agencies sounded the alarm on Tuesday about plans by President Tayyip Erdogan to tighten his grip on monetary policy.
The lira has dropped around 18 percent this year, making it one of the worst performing emerging markets currencies, over concerns about Erdogan's influence on the central bank. A self-described "enemy of interest rates", he wants borrowing costs lowered to spur credit growth and construction. The lira fell sharply last week after he said he would seek greater control over monetary policy after elections next month.
"Monetary policy in Turkey has long been subject to political constraints, but an explicit threat to curb the central bank's independence increases risks to the policymaking environment and to policy effectiveness," ratings agency Fitch said. "Greater erosion of monetary policy independence would put further pressure on Turkey's sovereign credit profile."
A senior sovereign analyst at S&P Global, Frank Gill, told Reuters that government finances could deteriorate rapidly if authorities failed to stem pressure on the currency and government borrowing costs. Investors want to see decisive interest rate increases to rein in double-digit inflation and Erdogan's comments have reinforced long-standing worries about the central bank's ability to do that.
The lira was at 4.6435 to the dollar at 1445 GMT, from Monday's close of 4.5740 and having earlier weakened to a record low of 4.6608. The major credit agencies all rate Turkey's sovereign debt at non-investment grade.
Following a downgrade this month to BB-, S&P already rates Turkey lower than Fitch or Moody's. Gill said it could potentially act again if the currency rout continued. "The concern is that the balance of payments situation worsens and that really starts to hit growth and the fiscals pretty quickly, and the banks," he said.
The selloff has heightened expectations that the central bank - which said last week it was monitoring "unhealthy price formations" and would take necessary steps - may raise interest rates before its next scheduled policy meeting on June 7. "The central bank will have to step in at this point," said Cristian Maggio, head of Emerging Market strategy at TD Securities. "The problem with Turkey is that the independence of monetary policy has been largely compromised by the way the politics works."
The yield on Turkish ten-year government bonds fell to its lowest in four sessions having earlier touched its highest in at least eight years. The main share index rose 1.2 percent.