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The besieged Turkish lira staged its strongest rally in more than two years on Monday after the surprise departures of the country’s finance leaders and central banks.
The Turkish lira held its largest rally in more than two years on Monday, climbing nearly 6% after the surprise departure over the weekend of the finance minister and central bank governor, whose replacement said he would focus on inflation.
Newly installed governor Naci Agbal said the central bank would “decisively” use all political tools to achieve its primary goal of price stability. Turkish inflation has held steady at around 12% throughout the year, well above a target of around 5%.
The currency’s gains in volatile trading reversed a slide last week to record lows as analysts raised expectations of an interest rate hike that could ease pressure on the exchange rate and, for example, therefore, on inflation and the foreign trade deficit.
The rally followed a surprise statement by Finance Minister Berat Albayrak on Sunday that he was resigning for health reasons. A day earlier, President Recep Tayyip Erdogan sacked Murat Uysal as governor of the central bank, replacing him with Agbal, a former finance minister.
As the brutal management shake-up raised political questions, investors applauded Agbal’s initial public comments.
The central bank “will decisively use all political tools to achieve its goal of price stability,” he said in a statement promising better communication and a more transparent and predictable approach.
Price increase?
Agbal, a close ally of Erdogan, said developments would be followed until a political meeting scheduled for November 19, when “the necessary political decisions are taken.”
At 8:54 a.m. on Friday, the read was from 8:12 a.m. to 10:22 a.m. GMT on Monday.
It was the largest one-day rally since the currency rebounded from a record low in August 2018, a month after Albayrak became finance minister.
Sekerbank chief economist Gulay Elif Yildirim said Agbal’s statement raised uncertainty about the possibility of an emergency policy meeting before November 19.
Erdogan has long publicly called for lower rates and warned last month against the ‘devil’s triangle’ of interest rates, currencies and inflation – raising further concerns about independence central bank policy.
The central bank raised rates in September, but last month it resisted general expectations of a further policy tightening and kept its key rate at 10.25%, triggering another sell off on the lira.
Agbal briefed Erdogan and spoke with bank executives, regulators and economists on Sunday, sources told Reuters news agency.
The lira also rebounded 5% to 9.6 against the euro, after peaking near 10.2 last week.
The reversal follows a 30% slide this year to record lows amid the COVID-19 pandemic, as investors worried about declining foreign exchange reserves and the central bank’s ability to fight against double-digit inflation.
In a lowering risk measure, Turkey’s five-year credit default swaps fell below 500 basis points from July levels, while Istanbul’s main stock index rose 3%.
Some analysts said the double starts could pave the way for wider moves to stop the lira falling.
Others wanted more proof.
“Until Turkey adopts a much more restrictive monetary policy, the downside risks for the currency remain,” said James McCormick, global head of office strategy at Natwest, who called the removal of Uysal “Not particularly encouraging” given concerns about monetary independence.
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