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The Turkish lira could plunge as much as 15% in a “bad reaction” when financial markets reopen on Monday, analysts warned, after President Recep Tayyip Erdoğan sacked the country’s central bank chief days after a strong rising interest rates.
An expert calling the move one of the worst public policy decisions in history, Erdoğan shocked global investors by removing the bank chief after just five months and replacing him with a party loyalist.
Erdoğan has opposed orthodox economic policy and has repeatedly opposed the use of rate hikes as a means of controlling double-digit inflation. He has now sacked three bank governors in two years.
But analysts predicted the lira would fall when markets reopen as the bank’s credibility takes another hit.
Outgoing governor Naci Agbal, who was appointed in November, won market praise by aggressively raising the policy rate by a total of 875 basis points to 19%, the highest in any major economy.
Its shock removal, announced in the early hours of Saturday, came after the bank raised rates 200 basis points more than expected on Thursday in a move to curb inflation, currently around 16%, and to support the currency.
Erdoğan immediately appointed Sahap Kavcioglu, a former MP for his ruling AK party, and the new leader is expected to reverse last week’s rate hikes.
Tim Ash, Sovereign Emerging Markets Strategist at Bluebay Asset Management, said: “This move is almost as bad as Brexit in that it is the worst public policy decision I can remember in the history of a country.
“The markets will voice their opinions on Monday and it will probably be a bad 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 could easily sell for 10-15% … We will see that start on Monday, when Asian trade kicks in.”
A lack of monetary independence has exacerbated Turkey’s booming economy and helped keep inflation in double digits for most of the past four years, economists say. Lira has lost half of its value since 2018.
“This implies that the government will try again to stimulate the economy with low interest rate policies,” said Selva Demiralp, director of the Economic Research Forum at Koc-TUSIAD University in Istanbul.
“Such a priority has great potential to backfire by putting extreme pressure on the lira and contracting the economy even further,” she said.
Kavcioglu, the fourth central bank chief in five years, is well known to local bankers but little known to mainstream economists and foreign investors.
Before being elected in 2015 to AKP stronghold in northeast Turkey, he was deputy managing director of state lender Halkbank as part of a career spanning more than 25 years in the banking industry.
A trader at a local bank predicted that Kavcioglu would offer a rate cut before the next policy meeting scheduled for April.
“There is now a very real chance that Turkey is heading for a messy balance of payments crisis,” wrote Jason Tuvey, analyst at Capital Economics, in a note.
Since Agbal’s appointment on Nov. 7, the lira has rebounded more than 15% from a record low above 8.50 per dollar. It won rains from foreign economists and analysts as some $ 20 billion in foreign funds also infiltrated Turkish assets, reversing years of exits.
But even though Erdogan named Agbal in what he called a new market-friendly economic era, the president continued to urge a rate cut. Announcing reforms this month, he said price stability should be “put aside”.
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