Turkish Lira Slips on Erdogan Rates Talk, Lags EM Currency Index

The Turkish lira was the worst-performing emerging-market currency on Monday, as President Recep Tayyip Erdogan’s comment on interest rates fanned concerns about a return to the unconventional monetary policies he has espoused in the past.

The lira dropped 0.6% against the dollar, bringing its year-to-date depreciation to about 16% this year. In contrast, MSCI’s EM currency index was largely flat on Monday and is marginally in the red for 2024.

Erdogan’s comment that interest rates would definitely fall next year and that “2025 will be the mark year for this” came after Turkey’s central bank cut its policy rate for the first time since 2023. Analysts now expect rates to fall at every policy meeting in 2025, despite officials cautioning against an uninterrupted easing cycle. 

Erdogan’s statement “might raise market concern that there may be an interest rate cut process that is not compatible with inflation,” said economist Haluk Burumcekci of Burumcekci Research and Consulting in Istanbul.

He said the statement casts “a shadow over the new CBRT management, which has completed the test of the interest rate hike process with higher credibility, making its job more difficult in the even more critical test of the easing process.”

Turkish stocks edged higher, meanwhile, while MSCI’s EM equity index slipped for the third day, tracking Friday’s weaker Wall Street close as the prospect of fewer US rate cuts next year kept Treasury yields near multi-month highs. 

South Korean stocks dropped as much as 0.6%, with Jeju Air Co. shedding 16% to touch a record low after one of the carrier’s aircraft crashed on Sunday, killing 179 people. The stock of its parent AK Holdings Inc. fell 12%. The benchmark is down for the sixth straight month, set for its longest losing streak since 2008.

The air crash came amid intense political turmoil that’s seen two leaders impeached in two weeks. On Monday investigators sought a warrant to arrest the impeached Yoon Suk Yeol who has defied summons to appear for questioning.

The won currency remained in the red against the dollar, having briefly gained after authorities pledged to stabilize markets. 

Analysts at Citigroup Inc. said the constitutional court would likely uphold Yoon’s impeachment, potentially leading to a presidential election in May. This means political uncertainty could stay “higher for longer due to differing incentives of political parties on the timing of an election,” they added in a note.