Exchange offices in Istanbul, Turkey, seen on October 28, 2020. Due to rising exchange rates and economic instability, people change currency and buy Turkish lira.
Erhan Demirtas | NurPhoto via Getty Images
The Turkish lira fell sharply on Monday morning after President Recep Tayyip Erdogan fired the head of the country’s central bank, the third to be fired in two years, sending shock waves to the investor community.
According to analysts, the currency fell more than 16% in Asian operations early in the morning, with 8.4 against the dollar compared to a close of 7.21 on Friday. It reduced some trade losses around 7.9 to the dollar at 11 a.m. local time, although the green dollar was still up nearly 10% from the lira.
The news is based on the economy of 82 million people and could affect other emerging markets exposed to the lira; Japan’s markets fell Monday morning as the currency move affected long-pound traders.
“This is a really stupid decision by Erdogan and the markets will express their views on Monday and it is likely to be an ugly reaction,” wrote Timothy Ash, Bluebay Asset Management’s chief emerging market strategist, in a client email during the weekend.
“People are just shocked,” Ash added Monday, describing the fall of the currency as “the price of firing Agbal.”
Naci Agbal, who was ousted by Erdogan on Saturday, had served less than five months at the helm of Turkey’s central bank. During this time, it raised the country’s main interest rate by about 450 basis points to 19%, which the vast majority of economists believe is necessary to domesticate Turkey’s high inflation and bring stability to the lira.
The period also meant an improvement in investor confidence and $ 10 billion in portfolio inflows, as well as an 18% appreciation of the lira, but it caught Erdogan’s wrath as the president has been handling it for years. interest rates, which he describes as “bad”. The president gave no reason for the dismissal, but it came just two days after Agbal raised rates by 200 basis points.
The Turkish presidency office did not respond to CNBC’s request for comment.
Turkish President Tayyip Erdogan speaks during a meeting with businessmen in Istanbul, Turkey, on January 15, 2021.
Presidential Press Office via Reuters
The financial community’s response to the Erdogan movement was swift and overwhelmingly negative.
“Turkey is once again surrounded by a monetary policy crisis,” Société Générale analysts wrote on Monday. “With the expulsion of Naci Agbal from the CBRT, Turkey loses one of its last anchors of institutional credibility.”
Commerzbank also described Agbal as someone who had been good at the country’s finances.
“Removing the market-friendly governor is likely to undermine the credibility of the policies in our view,” their emerging market analysts wrote Monday. “In a scenario of reversal of $ 10 billion portfolio over the past four months and / or a resumption of dollarization, we may see a significant increase in volatility, which is likely to result in interventionist policies again.”
“Inflation is likely to accelerate”
The story is not new; economists have long been wary of what many describe as the strength Erdogan made of the central bank to keep interest rates lower, which frightened investors at the bank’s lack of monetary policy autonomy. This, along with other factors, such as falling foreign exchange reserves and high debt levels, have brought the currency down for years; at the end of 2017, a dollar bought 3.5 lire; today you can buy about 8.
Erdogan’s desire to keep rates low comes from his view that interest rates cause inflation; the vast majority of economists argue that it is the other way around and that Turkey desperately needs a tightening of monetary policy to stifle the current level of 15% inflation and strengthen the currency. Inflation in the country has been caused in large part by credit-driven growth, the depreciation of the currency and rising global energy prices.
Agbal’s replacement, Sahap Kavcioglu, now the fourth head of central banker in two years, is believed to be more flexible to Ergodan’s demands and has written in previous newspaper columns that higher rates will not solve Turkey’s problems.
On Sunday, in his first communication as governor of the central bank, he did not mention any continuation of the monetary tightening. Analysts and international banks now expect the lira to fall further if the central bank does not raise rates.
“Inflation is likely to accelerate as the pound falls further, inflation expectations rise and several global factors weigh more heavily on the situation,” Erik Meyersson, senior economist at Handelsbanken Macro Research, told CNBC in Stockholm.
“It will need a lot from the Turkish authorities to prevent another financial crisis in the next period.”