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By Bloomberg

The lira slid toward a record as Turkey’s central bank failed to stem a selloff sparked by concern the government is interfering in monetary policy and speculation the U.S. is moving closer to raising interest rates.

The lira fell as much as 1.7 percent to 2.6462 per dollar, within 0.1 percent of an all-time low, as Societe Generale SA said Turkey’s currency is among the most vulnerable to outflows in the runup to higher U.S. borrowing costs. The central bank on Tuesday changed reserve-requirement conversion rates to release foreign currency into the banking system in its latest measure to stem the lira’s worst start to a year since 2009.

“The lira is at the edge of the vicious” cycle, Ipek Ozkardeskaya, a currency strategist at Swissquote Bank AS in Gland, Switzerland, said by e-mail. “As the central bank attempts to curb the selling pressures on lira by alternative measures, the reluctance to act on interest rates should continue keeping the downside pressures tight.”

Central bank Governor Erdem Basci is hindered in his ability to use interest-rate policy to prop up the lira after a chorus of politicians, including President Recep Tayyip Erdogan, called for deeper cuts to borrowing costs. The pressure has sent price swings in the lira to the highest since 2011 and prompted Basci to look to other tools to tighten monetary policy.

Basci Briefing

Basci will brief Erdogan on Wednesday, Prime Minister Ahmet Davutoglu told his party’s lawmakers in parliament on Tuesday. Davutoglu later chaired a meeting on the economy with officials including Basci, Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek, state-run Anadolu Agency reported.

The selloff in Turkish assets worsened after Federal Reserve Bank of Dallas President Richard Fisher said the U.S. central bank should begin to gradually raise rates as the labor market improves.

Stocks fell to the lowest level in almost three months and government bonds decreased, sending yields higher for a fourth day. The lira weakened 1.2 percent to 2.6327 per dollar by 6:11 p.m. in Istanbul, bringing its drop in 2015 to 11 percent, the worst performer after Brazil’s real and Bulgaria’s lev among 24 developing nations.

Some government officials have toned down their rhetoric on the central bank, which has cut the key rate by 250 basis points to 7.5 percent in five moves since an emergency rate increase in January 2014.

Economy Minister Nihat Zeybekci, who said last week policy makers should have cut rates twice more by now, said on Tuesday his comment didn’t mean he was calling for more reductions now. Deputy Prime Minister Bulent Arinc said on Friday politicians should keep quiet on monetary policy.

Risk Premium

“The lira has been suffering from a rising country-risk premium due to intensifying concerns of political pressure on the Central Bank of Turkey,” Gokce Celik, an economist at Finansbank AS in Istanbul, said in e-mailed comments. Government calls to ease policy “are likely to continue, especially against a backdrop of weak growth outlook,” she said.

Economic growth slowed to 3 percent last year from 4.1 percent in 2013, according to forecasts compiled by Bloomberg. While inflation fell to 7.6 percent in February from as high as 9.5 percent in mid-2014, it remains more than two percentage points above Basci’s target.

The central bank on Tuesday lowered the conversion rate for the first 30 percent of bank reserves held in foreign currencies, a move that will help release about $1.5 billion of funding from March 13, it said in a statement. It also raised the conversion rate for holdings of 55 percent or more.

Policy makers have reduced the supply of liras at weekly auctions of repurchase agreements for five days in a row and boosted the size of their foreign-currency auctions to $60 million over the same period, the most this year.

Lira Forecast

“We can’t rule out any central bank foreign-exchange interventions that could temporarily support the lira,” Guillaume Tresca, an emerging-market strategist at Credit Agricole SA in Paris, said by e-mail. “But don’t get me wrong, I see further lira weakening in the medium term.”

The currency could fall 2.7 per dollar in the coming days, according to Bernd Berg, an emerging-market strategist at Societe Generale. The yield on two-year government notes rose five basis points to 8.85 percent. The Borsa Istanbul 100 Index of equities retreated 3.3 percent, led by banks.

“With investors rushing to the exit the Turkish lira is under intense selling pressure, I expect the sell-off in the lira to intensify,” he said in an e-mailed note.