The Turkish lira could plunge up to 15% in an “ugly reaction” when financial markets reopen on Monday, analysts have warned, after president Recep Tayyip Erdoğan sacked the country’s central bank chief days after a sharp rise in interest rates.
With one expert calling the decision “as bad as Brexit”, Erdoğan shocked global investors by removing the bank chief after only five months and replacing him with a party loyalist.
Erdoğan has set his face against orthodox economic policy and has repeatedly opposed using rate hikes as a means of controlling double-digit inflation. He has now sacked three bank governors in two years.
But analysts predicted that the lira would tumble when markets reopened as the bank’s credibility took another hit.
The outgoing governor, Naci Agbal, who was appointed in November, had won market praise by aggressively raising the policy rate by a total of 875 basis points to 19%, the highest of any big economy.
His shock removal, announced in the early hours of Saturday, came after the bank hiked rates by a greater-than-expected 200 basis points on Thursday in a move designed to curb inflation, currently around 16%, and support the currency.
Erdoğan immediately appointed Sahap Kavcioglu, a former member of parliament for his ruling AK party, and the new chief is expected to reverse last weeks’s rate increases.
Tim Ash, senior emerging markets sovereign strategist at Bluebay Asset Management, said: “This decision is almost as bad as Brexit in terms of being the worst public policy decision I can remember in a country’s history.
“Markets will express their opinions on Monday and it is likely to be an ugly reaction.”
“This announcement demonstrates the erratic nature of policy decisions in Turkey, especially with regard to monetary matters,” said Cristian Maggio, head of emerging market strategy at TD Securities in London. “The Turkish lira may easily sell-off 10-15%.... We will see this start on Monday, when Asia trading kicks in.”
A lack of monetary independence has exacerbated Turkey’s boom-bust economy and helped keep inflation in double digits for most of the last four years, economists say. The lira has lost half its value since 2018.
“This implies the government will once again try to stimulate the economy by low rate policies,” said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum, in Istanbul.
“Such a priority has a high potential to backfire by causing extreme pressures on the lira and contracting the economy even further,” she said.
Kavcioglu, the fourth central bank chief in five years, is well known among local bankers but little known among mainstream economists and foreign investors.
Before being elected in 2015 in Turkey’s northeast AKP stronghold, he was deputy general manager at state lender Halkbank as part of a more than 25-year career in banking.
A trader at one local bank predicted Kavcioglu would deliver a rate cut before the next scheduled policy meeting in April.
“There is now a very real chance that Turkey is heading for a messy balance of payments crisis,” Jason Tuvey, analyst at Capital Economics, wrote in a note.
Since Agbal’s appointment on 7 November, the lira had rebounded more than 15% from a record low beyond 8.50 to the dollar. He won plaudits from foreign economists and analysts as some $20bn of foreign funds also trickled into Turkish assets, reversing years of outflows.
But even though Erdogan appointed Agbal as part of what he called a new market-friendly economic era, the president continued to urge lower rates. In announcing reforms this month, he said price stability should be “put aside”.
The Guardian