The Turkish lira could plummet up to 15% in an “ugly reaction” when financial markets reopen on Monday, analysts warned, after President Recep Tayyip Erdoğan sacked the country’s central bank president days after a sharp rise in interest rates. fees.
With an expert calling the decision one of the worst public policy decisions in history, Erdoğan shocked global investors by dismissing the bank’s chief after just five months and replacing him with a partisan supporter.
Erdoğan opposed orthodox economic policy and repeatedly opposed the use of rate hikes as a means of controlling double-digit inflation. He has already fired three bank governors in two years.
But analysts predicted that the lira would fall when markets reopen, when the bank’s credibility has suffered another blow.
Outgoing governor Naci Agbal, who was appointed in November, won market acclaim by aggressively raising the basic interest rate by a total of 875 basis points to 19%, the highest in any major economy.
The shock removal, announced early on Saturday, came after the bank raised rates by more than expected 200 basis points on Thursday, in a move designed to contain inflation, currently around 16%, and support the currency.
Erdoğan immediately appointed Sahap Kavcioglu, a former member of parliament for his ruling party, AK, and the new chief is expected to reverse last week’s rate hikes.
Tim Ash, senior sovereign emerging market 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 views on Monday and it is likely to be an unpleasant reaction.”
“This announcement demonstrates the erratic nature of political decisions in Turkey, especially with regard to monetary issues,” said Cristian Maggio, head of emerging markets strategy at TD Securities in London. “The Turkish lira can easily sell 10-15% … We will see this start on Monday, when Asian trade comes into play.”
The lack of monetary independence has exacerbated Turkey’s economic boom and has helped to maintain double-digit inflation for most of the past four years, economists say. The lira has lost half its value since 2018.
“This implies that the government will once again try to stimulate the economy through low-interest policies,” said Selva Demiralp, director of the Economic Research Forum at Koc-TUSIAD University in Istanbul.
“This priority has a high potential to backfire, as it causes extreme pressure on the lira and further constrains the economy,” she said.
Kavcioglu, the fourth president of the central bank in five years, is well known among local bankers, but little known among traditional economists and foreign investors.
Before being elected in 2015 in the AKP stronghold in northeastern Turkey, he was deputy general manager of the state-owned bank Halkbank as part of a more than 25-year career in the banking sector.
A trader at a local bank predicted that the Kavcioglu would deliver a rate cut ahead of the next monetary policy meeting scheduled for April.
“Now there is a very real chance that Turkey is heading towards a confused balance of payments crisis,” wrote Jason Tuvey, an analyst at Capital Economics, in a note.
Since Agbal’s appointment on November 7, the lira had recovered more than 15% from a record low of more than 8.50 per dollar. He won plies from foreign economists and analysts, as some $ 20 billion of foreign funds were also trickling into Turkish assets, reversing years of withdrawals.
But while Erdogan appointed Agbal as part of what he called a new market-friendly economic era, the president continued to call for lower rates. In announcing the reforms this month, he said that price stability should be “pushed aside”.