Foreign exchange offices in Istanbul, Turkey, seen on October 28, 2020. Due to rising exchange rates and economic instability, people are exchanging their currency and buying Turkish lira.
Erhan Demirtas | NurPhoto by Getty Images
The Turkish lira fell dramatically on Monday morning after President Recep Tayyip Erdogan fired the country’s central bank chief – the third to be fired in two years – sending shockwaves through the investor community.
The currency fell more than 16% in Asian trading early in the morning, according to analysts, reaching 8.4 against the dollar compared to the close of 7.21 on Friday. It reduced some trading losses by around $ 7.9 by 11:00 local time, although the green dollar rose by almost 10% against the pound.
The news is intended to further shake the economy of 82 million people and could have a negative effect on other emerging markets exposed to the pound; Japanese markets fell on Monday morning as the currency movement hit long-pound traders there.
“This is a truly idiotic decision by Erdogan, and the markets will express their views on Monday and it is likely to be a bad reaction,” Timothy Ash, a senior market strategist at Bluebay Asset Management, wrote in an email. of the client on the weekend.
“People are just shocked,” Ash added Monday, describing the fall of the currency as “the price of Agbal’s dismissal.”
Naci Agbal, who was fired by Erdogan on Saturday, served for less than five months at the helm of Turkey’s central bank. During that period, it raised the country’s key interest rate by about 450 basis points to 19% – which the vast majority of economists consider necessary to tame Turkey’s high inflation and bring stability to the pound.
The period also saw an improvement in investor confidence and $ 10 billion in portfolio flows, as well as an 18% pound appreciation – but it angered Erdogan as the president spent many years against interest rates, which he calls “bad.” The president gave no reason to shoot, but came just two days after Agbal raised rates by 200 basis points.
The Turkish presidency’s 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 through Reuters
The financial community’s response to Erdogan’s move was swift and overwhelmingly negative.
“Turkey is once again embroiled in a monetary policy crisis,” Societe Generale analysts wrote in a statement on Monday. “With the removal of Naci Agbal from the CBRT, Turkey is losing one of the last remaining anchors of institutional credibility.”
Commerzbank also described Agbal as someone who was good at the country’s finances.
“Removing the market-friendly governor is likely to affect the credibility of the policy in our view,” his analysts in emerging markets wrote Monday. “In a scenario of reversing portfolio revenues over the past four months of $ 10 billion and / or the resumption of dollarization, we may see a major increase in volatility, likely resulting again in interventionist policies.”
“Inflation is likely to accelerate”
The story is not a new one; economists have long been wary of what many describe as Erdogan’s strong arming of the central bank to keep interest rates lower, terrifying investors about the bank’s lack of monetary policy autonomy. This, along with other factors, including declining foreign exchange reserves and high debt levels, has caused the currency to decline for years; at the end of 2017, a dollar bought 3.5 pounds; today, can buy almost 8.
Erdogan’s desire to keep rates low stems 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 15% inflation rate and support the currency. Inflation in the country was largely caused by credit-driven growth, currency depreciation and rising global energy prices.
Agbal’s replacement, Sahap Kavcioglu, now the fourth head of the central banker in two years, is believed to be more flexible than Ergodan’s demands and wrote in previous newspaper columns that higher rates will not solve Turkey’s problems.
In his first communication as governor of the central bank on Sunday, he did not mention any further monetary tightening. Analysts and international banks now expect the pound to fall further if the central bank does not raise rates.
“Inflation is likely to accelerate as the pound picks up again, inflation expectations are rising and various global factors continue to influence the situation,” Erik Meyersson, a senior economist at Handelsbanken Macro Research in Stockholm, told CNBC.
“It will take a lot from the Turkish authorities to avoid another financial crisis in the next period.”