Turkey Tumult Prompts Lira’s Worst Weekly Retreat Since 2023

(Bloomberg) — The Turkish lira headed for its steepest weekly drop in nearly two years and stocks slumped as an emergency interest-rate increase failed to halt the currency’s retreat amid mounting political tensions.

The detention of a key opposition politician, Istanbul Mayor Ekrem Imamoglu, rattled investors this week, sending markets into a nosedive on Wednesday and prompting action from the central bank to stop locals from switching their savings into dollars.

The currency was trading down 0.4% at 37.9482 per dollar at 6:17 p.m. in Istanbul on Friday, extending its losses over the past five days to 3.7% — its worst performance since June 2023. 

Losses in bonds and stocks also accelerated. The benchmark Borsa Istanbul 100 Index slumped 7.8%, triggering circuit breakers and adding to a weekly retreat that’s erased about $30 billion from the value of the Turkish equity market. A gauge of banking stocks saw its worst weekly drop since at least 2001. The yield on 10-year government bonds rose 207 basis points to 33.38%. 

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Lenders sold as much as $9 billion to curb currency volatility earlier in the week, a central bank official told Bloomberg, while policymakers delivered a shock increase to the overnight interest rate on Thursday. Goldman Sachs Group Inc. economists said the move was aimed at containing outflows from lira deposits. 

In addition, the central bank on Friday said it would issue a 91-day bill aimed at absorbing excess lira liquidity in the market and ensuring tight monetary policy. The auctions will start Monday, the bank said in a statement.  

Protesters have taken to the street since Imamoglu — President Recep Tayyip Erdogan’s most powerful rival — was detained. Investors are waiting to see if the demonstrations escalate over the weekend as the main opposition party is planning more gatherings on Friday evening.

“Pure local political risks” are driving the market turmoil, said Tufan Comert, an emerging market strategist at BBVA SA in London.

Thursday’s 200-basis-point hike to Turkey’s overnight lending rate will allow policymakers to raise the average cost of funding they provide to commercial lenders and prevent a weaker lira from stoking inflation. The bank also said it would suspend lending at its lower, benchmark rate of one-week repo — which stands at 42.5% — for an unspecified period.

The offshore lira market also started to show stress, with the cost of borrowing in the Turkish currency at 115% on Friday, up from 49% on Thursday when the market appeared to stabilize following the central bank steps. 

Goldman, along with other banks, sees a reduced chance of an interest-rate cut at the central bank’s next meeting, on April 17. The expectations have hit banking stocks hard, with the BIST Banks Index down 26% in the week.  

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