The lira slumped 8 percent to a record low of 12.49 versus the dollar on Tuesday on intensifying worries about Turkey’s unconventional monetary policy, while Russia’s rouble recovered but worries about a war with Ukraine kept it at four-month lows.
Turkish President Tayyip Erdogan, long demanding stimulus to spur economic growth, defended lower policy rates on Monday, vowing to succeed in his “economic war of independence.”
The policy rate now stands at 15 percent while inflation runs at 20 percent.
Speculation that Erdogan might soon replace Finance and Economy Minister Lutfi Elvan further fanned worries.
The lira is now down more than 37 percent against the dollar in 2021, significantly lagging other emerging market peers, with volatility gauges spiking.
“We would have to really start to see strains building in the banking sector before we might get a change in course. So far banks have been weathering this really well.
So long as that remains the case, I suspect the central bank will not raise rates,” said Jason Tuvey, senior EM economist at Capital Economics, adding the lira may fall beyond 13.
Risk sentiment was more broadly hit after US President Joe Biden picked Federal Reserve chief Jerome Powell to lead for another term, raising bets that the central bank may tighten policy faster than expected, which could pull funds away from EM assets.
EM stocks hit six-week lows, with some gains in mainland China, India, Turkey and Russian stocks capping losses.
Central banks in developing economies ramping up interest rates will be supportive for emerging market debt, but could spell trouble for equities, BlackRock said on Monday.