April 16, 2018 / 9:23 AM / in 2 months

Turkey's lira weaker, Moody's sounds alarm over currency and inflation

ISTANBUL (Reuters) - Turkey’s lira was a touch weaker on Monday after plumbing a series of record lows last week, as investor alarm about double-digit inflation has been heightened by President Tayyip Erdogan’s drive for lower interest rates.

FILE PHOTO - A money changer counts Turkish lira bills at an currency exchange office in central Istanbul, Turkey, August 21, 2015. REUTERS/Murad Sezer/File Photo

The sell-off in the lira - it is one of the worst performing emerging-market currencies this year, down more than 7 percent against the dollar - highlights the divide between Erdogan and international investors over monetary policy.

The president, a self-described “enemy of interest rates” wants to keep borrowing costs low to stimulate growth, particularly through construction projects, ahead of next year’s elections. Investors fear the central bank is unable to rein in inflation because of pressure from Erdogan.

“The government appears determined to keep the economy growing rapidly ahead of national elections scheduled for November 2019, regardless of the costs,” Moody’s said in a note on Monday, adding that the weakness in the lira was “credit negative” for Turkey’s sovereign debt rating.

“This tense situation is an important test of the delicate balance between Turkey’s fundamental strength from its dynamic economy and very strong fiscal metrics – and its high and rising external vulnerability,” Moody’s said.

Economists say the lira’s slide is a reflection of entrenched inflation and wage growth and that interest rates need to be raised to arrest its fall.

The lira was at 4.0954 to the dollar at 0912 GMT, slightly softer from Friday’s close. Last week it set a record low of 4.1944. It was trading at 5.0643 against the euro after setting a record low of 5.1914 last week.

Lira and emerging market performance YTD - reut.rs/2GTYCxl

‘EXCHANGE-RATE WAR’

Erdogan and his ministers have frequently cast the sell-off as an economic attack by outside forces, likening it to the failed military putsch that sought to topple his government in 2016.

“They got up and declared an exchange rate war against us. Whatever you declare, you will end up empty-handed. Hey, those in the finance sector: Do not try and threaten us with the exchange rates and so on,” Erdogan said in a speech in Istanbul on Sunday.

“If the finance sector does not commit this treason against the nation and does its duty, we will give every kind of support. For this they must lower this scourge called interest rates,” he said.

Industrial production rose 9.9 percent in February from a year earlier, data showed on Monday, marking the smallest increase in three months.

Meanwhile, the unemployment rate rose to 10.8 percent in the December-February period, separate data showed.

The budget showed a deficit of 20.2 billion lira (£3.4 billion) in March, the finance minister said.

Additional reporting by Ece Toksabay in Ankara and Michael Shields in Zurich; Writing by David Dolan; Editing by Daren Butler

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