Turkey’s currency tumbled to 14 percent after Recep Tayyip Erdogan fired the country’s head of the central bank, which was seen as a key force in lifting the lira from historic lows.
According to two market participants, the lira traded around 8.4 against the US dollar early in the trading day in Asia and the Pacific. This is a serious drop from the closing level of Friday around TL7.22.
Volumes are usually thin in the lira-dollar pair during a time when most commercial banks are still closed. However, a source from one currency trading bank said that even at that early hour, there were already several hundred million dollars in turnover.
The removal of Naci Agbal, which was announced in the early hours of Saturday morning, shocked many local and foreign investors who applauded the official’s decision to move Turkey to a more orthodox monetary policy.
“Settling the short-term macro policy is going to be painful,” said Edward Al-Hussainy, a senior analyst of rates and currencies at Columbia Threadneedle, adding that it would affect the attractiveness of Turkish assets.
The appointment of Agbal in November, which was part of a larger upturn in economic leadership, helped fuel a sharp rise in the lira after the currency fell to a historic low. The lira was at one point the best-performing emerging market currency of 2021 and recovered nearly a fifth of the trough from about 8.58 to the US dollar on November 6th.
The lira rose last Thursday after Agbal raised the interest rate by 2 percentage points, which is double what economists expected and added a 6.75 percentage point increase that it oversaw last year.
Investors have long called for a tighter monetary policy in Turkey to tame inflation that exceeds 15 percent and weaken strong outflows from foreign investors.
Ehsan Khoman, head of emerging market research at MUFG Bank in Dubai, said Agbal’s leadership and the central bank’s prudent measures played an ‘important role’ in restoring confidence in the lira and Turkish assets.
Traders and analysts are now worried that Erdogan’s decision to put Sahap Kavcioglu in the role could quickly erode the profits made by Agbal’s short term. Kavcioglu is a little known professor of banking and a former legislator of the ruling party for justice and development.
The new head of the central bank wrote in his column in the Islamic newspaper Yeni Safak last month that ‘interest rate hikes will indirectly lead to an increase in inflation’ – a view that is contrary to most modern macroeconomic theories and one which is also advocated by Erdogan. an outspoken opponent of high rates.
Robin Brooks, chief economist of the think tank of the Institute of International Finance, said Turkey was now in danger of ‘large’ inflows of investors that would put pressure on the lira.
Goldman Sachs warned on Sunday that it “sees significant risks of a short-term uninterrupted move in the lira”.
“Big surprises usually have market consequences, and I think we can expect fairly aggressive declines in the lira,” added Paul McNamara, an investment director at GAM.
Kavcioglu said in a statement on Sunday that the central bank “will continue to use monetary policy instruments effectively in line with its main objective of achieving a permanent decline in inflation”.
The sudden change in Turkey’s monetary policy leadership comes during a huge moment for emerging markets, which was under pressure as borrowing costs in the US and other developing markets climbed higher. Last week, Russia and Brazil both joined Turkey to raise interest rates as they tried to cover inflation.
Additional reporting by Katie Martin.