The Turkish lira could fall to 15% in an ‘ugly reaction’ when financial markets reopen on Monday, analysts warned after President Recep Tayyip Erdogan sacked the country’s central bank chief days after a sharp rise in interest rates.
With one expert calling the ruling one of the worst public policy decisions in history, Erdoğan shocked global investors by removing the bank chief after only five months and replacing him with a party loyalist.
Erdoğan has faced orthodox economic policies and has repeatedly opposed the use of rate hikes as a way to control double-digit inflation. He has now fired three bank governors in two years.
But analysts had predicted that the lira would tumble if the markets reopened, as the bank’s credibility took a hit again.
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(@ahval_en)Turkish lira unrest threatens after Erdoğan fires central bank chief https://t.co/U4d2Oal6hI | ▪ Ahval News ➖ pic.twitter.com/shasPZacrD
The outgoing governor, Naci Agbal, who was appointed in November, gained market price by aggressively raising the policy rate by a total of 875 basis points to 19%, the highest of any major economy.
Its shock removal, announced in the early hours of Saturday morning, came after the bank raised rates by more than the expected 200 basis points on Thursday, to curb inflation, currently around 16%, and support the currency.
Erdoğan immediately appointed Sahap Kavcioglu, a former MP for his ruling AK Party, and the new chief is expected to reverse the rate hikes last week.
Tim Ash, senior sovereign strategist of emerging markets at Bluebay Asset Management, said: ‘This decision is almost as bad as Brexit in terms of the worst public policy decision I can remember in the country’s history.
“Markets will express their opinion on Monday and that is probably an ugly reaction.”
“This announcement shows the volatile nature of policy decisions in Turkey, particularly with regard to monetary issues,” said Cristian Maggio, head of emerging market strategy at TD Securities in London. “The Turkish lira can easily sell 10-15% … We will start it on Monday when trading in Asia starts.”
Lack of monetary independence has exacerbated Turkey’s economy with a boom and helped keep inflation in double digits over the past four years. The lira has lost half its value since 2018.
“This implies that the government will once again try to stimulate the economy through low-rate policies,” said Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum, in Istanbul.
“Such a priority has great potential to flare up again by putting extreme pressure on the lira and raising the economy even further,” she said.
Kavcioglu, the fourth central banker in five years, is well-known among local bankers, but little known among mainstream economists and foreign investors.
Prior to being elected to Turkey’s northern AKP stronghold in 2015, 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 that Kavcioglu would deliver a rate cut ahead of the next scheduled policy meeting in April.
“There is now a very high chance that Turkey is heading for a sloppy balance of payments crisis,” Capital Economics analyst Jason Tuvey wrote in a note.
Since Agbal’s appointment on November 7, the lira has recovered by more than 15%, from a record low of more than 8.50 to the dollar. He won pluadits from foreign economists and analysts, as some $ 20 billion in foreign funds also slipped into Turkish assets, reversing years of outflows.
But although Erdogan appointed Agbal as part of what he called a new market-friendly economic era, the president still demanded lower rates. In announcing reforms this month, he said price stability should be ‘set aside’.