* President points to July or August for monetary easing
* Political interference has eroded central bank credibility
* Currency shed 16% since bank chief ousted in March (Adds analyst comments, updates prices)
ISTANBUL, June 2 (Reuters) – Turkey’s lira currency sank to new all-time lows on Wednesday after President Tayyip Erdogan urged the central bank’s new governor to cut interest rates in the next two months.
The lira – by far the worst performer in emerging markets this year largely due to perceived political interference in monetary policy – fell by some 4% in thin early trade to 8.88 versus the dollar before recouping most of its losses.
“I spoke to the central bank governor today – we certainly need to lower interest rates,” Erdogan said in a televised interview with state broadcaster TRT Haber late on Tuesday.
“For that, we need to see July, August for interest rates to start coming down,” he said, adding that would lift the burden on investments and help along recovery from the coronavirus pandemic.
The president’s frequent calls for lower borrowing costs and his abrupt removal of three central bank chiefs in less than two years have eroded investors’ confidence in Turkey’s policy-making and left the economy more vulnerable to high inflation and a financial crisis.
The currency was at 8.622 against the dollar at 08:02 GMT, down about 1%.
It has lost 16% since mid-March when Erdogan, a self-described “enemy of interest rates”, ousted a hawkish and well-respected central bank chief and installed a like-minded critic of tight monetary policy.
New bank Governor Sahap Kavcioglu has since held the policy rate at 19% though analysts expect a cut in the third quarter. Still, inflation has risen above 17% and the currency depreciation adds price pressure via heavy imports.
“Erdogan is getting impatient (and) openly and clearly … putting pressure on his central bank governor,” said Esther Reichelt, analyst at Commerzbank.
‘LATE NIGHT INTERVENTION’
Central bank leaders are set to hold calls with investors later on Wednesday to discuss policy and economic prospects.
“This late night intervention by Erdogan talking about rate cuts is clearly unhelpful for Kavcioglu heading into the investor calls,” said one foreign investor.
The currency has shed half its value in three years and slid again last week on concerns over possible early elections and global inflation, which could hurt vulnerable emerging markets if major central banks start raising rates.
Turkey’s economy rebounded better than most others from the pandemic and should grow by about 5% this year.
But its foreign debt and current account deficit remain swollen and its foreign currency reserves are badly depleted after costly market interventions last year. Adding to risks, travel restrictions could derail another tourism season, sapping more foreign revenues.
Enver Erkan, chief economist at Tera Yatirim, said the lira weakness suggests interst rate hikes rather than cuts may be more appropriate for Turkey despite Erdogan’s call for stimulus.
“The world is entering an inflation cycle,” he said. “Cutting rates faster than inflation causes other macro imbalances, starting with lira instability.”
The central bank has policy meetings scheduled for June 17, July 14 and August 12.
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